Kwong v. United States: A New Opportunity to Eliminate IRS Penalties (And Possibly Get Money Back)

A Recent Court Decision Could Change How COVID-Era Tax Penalties Are Treated

A late-2025 decision, Kwong v. United States, has created a significant opportunity for taxpayers who were charged IRS penalties and interest during the COVID-19 period.

For many people, this could mean:

• Eliminating penalties that were previously assessed
• Reducing overall tax balances
• Or even receiving a refund of penalties already paid

But like most tax issues, the details, and the timing, matter.

What the Court Said (In Plain English)

The court looked at Internal Revenue Code § 7508A(d) and concluded something important: When the federal government declares a disaster, tax deadlines are automatically postponed for the entire disaster period, plus an additional 60 days.

What that means in practice:

• Disaster Period: January 20, 2020 – July 10, 2023
• Effective Due Date for Many Tax Obligations: July 11, 2023

If your tax filing or payment was originally due during that window, the argument is:

The IRS should not have assessed penalties and certain interest during that time.

What Types of Penalties May Be Removed

If Kwong applies, it may impact:

• Failure-to-File penalties
• Failure-to-Pay penalties
• Underpayment interest tied to those periods

For many taxpayers, penalties are not a small add-on. They can make up a significant portion of the total balance.

Who May Qualify

Eligibility under Kwong is broader than many people expect.

It may apply to:

• Individuals
• Business owners
• Self-employed taxpayers
• Corporations and nonprofits

If you had a tax obligation due between January 2020 and July 2023, it is worth taking a closer look.

Why Most People Will Miss This Opportunity

In practice, most taxpayers who could benefit from Kwong will never request relief.

That is because:

• The IRS is not broadly advertising this
• Many people assume penalties are just part of the bill
• IRS account transcripts are not easy to read if you do not work with them regularly
• And most taxpayers do not revisit older tax years once they enter a payment plan

I see this regularly. Someone is making monthly payments to the IRS and never questions whether the balance itself is correct. But in many cases, a meaningful portion of that balance is penalties. If those penalties can be reduced or removed, the entire strategy changes.

The Deadline Is Critical

For most taxpayers: The deadline to request a refund or abatement is July 10, 2026

That may seem far away, but tax matters take time. Records need to be reviewed, transcripts analyzed, and the correct approach selected. Waiting too long can mean losing the opportunity entirely.

Real-World Examples

Example 1: Late Filing Penalties

A taxpayer files a 2021 return late and is assessed a failure-to-file penalty.

If the original due date falls within the disaster period, that penalty may not have been appropriate under Kwong.

Example 2: Payment Plan With Built-In Penalties

A taxpayer enters into an installment agreement in 2022.

Their balance includes several years of penalties.

If those penalties are reduced:

• The total balance drops
• Monthly payments may decrease
• The repayment timeline may shorten

Example 3: Penalties Already Paid

A taxpayer paid off a prior IRS balance in 2023, including penalties.

They may be able to file a claim to recover some of those penalties, depending on timing and eligibility.

Example 4: Larger Balance With Compounding Penalties

A business owner owes $85,000 to the IRS.

• Approximately $20,000 of that balance is penalties
• Additional amounts are interest tied to those penalties

If Kwong applies:

• The total balance could drop significantly
• Monthly payments could become more manageable
• Other resolution options may become more realistic

This is why reviewing the breakdown of the balance, not just the total, is so important.

How to Actually Request Penalty Relief

This is not automatic. In most cases, relief requires action.

Common approaches include:

• Penalty Abatement Requests:  Submitted directly to the IRS based on the legal argument under § 7508A(d)
• Refund Claims: Used when penalties have already been paid
• Formal Refund Claims: In more complex cases, required to preserve rights and potentially escalate the issue

The correct approach depends on:

• Whether the penalties are already paid
• Whether you are in collections
• Whether you are in an active resolution program

Filing the wrong type of request can delay or complicate the process.

Is the IRS Agreeing With Kwong?

This is still developing.

While Kwong provides a strong legal basis, the IRS has not fully implemented a uniform process for applying it across all cases.

That means:

• Some requests may be approved quickly
• Others may require follow-up or additional documentation
• Some may need to be escalated

This is not unusual when a court decision changes how the law is interpreted. But it does mean that strategy and timing matter.

How This Interacts With Bankruptcy (And Why Timing Matters)

Penalty relief does not exist in isolation. If someone is also considering bankruptcy, timing becomes important.

For example, reducing penalties before filing can change the overall analysis

In some situations, it makes sense to:

• Address penalty abatement first, then evaluate bankruptcy

In others, it may make more sense to:

• Move forward with bankruptcy and address remaining issues afterward

There is no one-size-fits-all answer. The order of steps can significantly affect the outcome.

Common Mistakes to Avoid

1. Assuming the IRS will fix this automatically
   They will not. Action is required.
2. Waiting too long
   The July 2026 deadline is firm for many claims.
3. Filing incomplete or incorrect requests
   This can lead to delays or denials.
4. Focusing only on the total balance
   The breakdown matters. Penalties can make up a large portion.
5. Ignoring older tax years
   Some of the biggest opportunities are in prior years that people have stopped reviewing.
6. Not looking at the bigger strategy
   Penalty relief should be part of an overall plan, not handled in isolation.

Frequently Asked Questions

Does Kwong eliminate all IRS penalties?
No. It applies only to certain penalties tied to obligations during the covered disaster period and still requires proper analysis.

Do I need to have filed late to qualify?
Not necessarily. It depends on the timing of the obligation and how penalties were assessed.

What if I am already on a payment plan?
You may still be able to request relief. In some cases, this can reduce your balance and your monthly payment.

Can I get money back if I already paid penalties?
Potentially, yes. If you file a timely claim and qualify, refunds may be available.

Is this something I can do on my own?
Some taxpayers can handle simpler situations, but strategy and execution matter, especially in more complex cases.

Final Thoughts

This is one of those situations where the opportunity is real, but so is the complexity.

Done correctly, Kwong could significantly reduce what you owe or even result in a refund.

Handled incorrectly, it can lead to delays, denials, or missed deadlines.

Need Help Evaluating Your Situation?

At Ashley F. Morgan Law, PC, we help clients analyze IRS balances, challenge penalties, and build strategies that actually work, both inside and outside of bankruptcy.

If you think this may apply to you, it is worth taking a closer look now rather than waiting until the deadline approaches.