Kwon v. United States offers tax refund opportunity by July 10th

For most filers, the tax deadline is fast approaching. But thanks to a federal court ruling, millions of Americans could still qualify for tax refunds on pandemic-era penalties and interest.

The issue stems from recent decisions such as Kwon v. United States, which held that the IRS should not have assessed certain penalties and interest from January 20, 2020 to July 10, 2023. This includes the federal COVID-19 disaster period through May 11, 2023, plus an additional 60 days. The court’s decision was based on an interpretation of the tax law provisions that provide for extension of filing and payment deadlines in the event of a disaster.

If taxpayers file their returns and pay their taxes on time, they generally have three years from the filing deadline to claim any unpaid refunds, with a deadline of July 10, 2026.

The court’s decision is not final and the government may still appeal.

But if the decision is upheld, it could give some filers a “significant refund opportunity,” Tax Advocate Erin Collins said in an April 30 blog post. Mr. Collins heads the Taxpayer Advocacy Service, an independent organization within the IRS.

Relief is not automatic, and affected taxpayers generally must take action by July 10 to receive a refund or reduction (penalty waiver), Collins wrote.

Taxpayers can be subject to IRS penalties, plus interest, if they miss their tax return and payment deadlines. The penalty for failure to file is 5% of the monthly unpaid tax up to a maximum of 25%, while the penalty for failure to file is 0.5% of the monthly balance with the same maximum limit.

The Kwon v. United States decision may have implications for taxpayers who incur penalties for late filing or nonpayment of taxes, including estimated tax payments and interest.

“This problem is widespread and not limited to a few small or specialized taxpayers,” Collins said in a second blog post on May 5. “The affected taxpayers represent a broad swath of the population, including individuals, small businesses, large corporations, estates, and trusts.”

During fiscal year 2023, the IRS assessed more than 14.2 million individual estimated tax payments and approximately 18.6 million unpaid penalties, according to the latest IRS data. However, some filers received reduced penalties.

With the July 10 deadline about two months away, some tax professionals are rushing to inform their clients about possible refunds and penalty reductions.

“These lawsuits open the door to what could be one of the largest waves of tax refund claims in recent years,” Victoria Boone, a tax consultant with Boone Tax Educators, told CNBC.

“However, the outcome remains uncertain, and taxpayers must act quickly to protect their rights while the legal situation continues to evolve,” said Boone, who worked at the IRS for more than 20 years.

You can use your tax records in your IRS online account to see if the IRS has charged you any eligible penalties or interest from January 20, 2020 to July 11, 2023, Collins said. She provided instructions and examples in a May 5 blog post.

Collins wrote that most taxpayers can use Form 843 to apply for a refund or reduction, but it cannot be filed electronically and must be mailed. She recommends sending the form by certified mail to prove it was filed on time.

If you have already paid penalties and interest, request a refund from the IRS. Unpaid balances will require reduction requests, she wrote in her third blog post on May 7.

Collins wrote that a “protection claim” would help preserve the right to reimbursement if the law has not been finalized. But before that, “taxpayers should consult a trusted tax professional, review IRS guidance, and maintain documentation to support their position.”