A recent tax-related court decision has shed a light on a relatively obscure corner of the Internal Revenue Code (Section 7508A) that may have significant implications – and provide refund opportunities – for certain taxpayers.
The prospect for refunds arises from an unintended but beneficial loophole embedded in statutory language enacted by Congress authorizing the IRS to provide for the mandatory temporary suspension of interest, penalties and time-sensitive deadlines incurred during federally declared disasters, including the disaster that was COVID-19.
IRC section 7508A(a) provides that for taxpayers affected by a federally declared disaster, the Secretary may specify a period (up to one year) that may be disregarded in determining any tax liability under the internal revenue laws, including:
- the postponement of certain tax-related deadlines;
- the assessment of interest, penalties and other additional tax and assessments; and
- the amount of any refund or credit.
More importantly, Internal Revenue Code (IRC) Section 7508A(d), as in effect during the COVID-19 pandemic, provides for a mandatory suspension, beginning on the earliest incident date specified in the disaster declaration and ending 60 days after the latest incident date specified. This language effectively suspends the assessment of interest and penalties on tax assessments during the duration of the COVID-19 (or any other qualified disaster) incident period, plus 60 days. The Court of Claims, as noted in its decision Kwong v. United States, No. 23-267 (Fed. Cl. Nov. 25, 2025), confirms this outcome.
Under the Court’s interpretation of the law existing at that time, interest, penalties and other assessments and filings are suspended for a period of three years during COVID-19 due to the government’s declared starting and ending date of that disaster. COVID-19 was declared a disaster starting January 20, 2020, and declared ended on May 13, 2023 (the “latest incident date so specified”).
Congress, apparently recognizing the potential impact of the statute as originally drafted, amended the statutory language in 2021, but the amendment’s effective date is for disasters declared after the date of enactment (or June 21, 2021). This is too late to take effect for the COVID-19 disaster, as the Court of Claims also notes:
Mr. Kwong’s view is correct under the court’s reading of the 2019 version of section 7508A. The 2019 version of the statute allows the period of automatic extension to run from “the earliest incident date” of the disaster declaration to “60 days after the latest incident date.” 26 U.S.C. § 7508A(d) (2019). The plain meaning of that statute is that the automatic extension runs from the beginning of the disaster declaration, through the end of the declared disaster period, and until 60 days after the end of the declared disaster period. The government does not dispute the plain meaning of the 2019 version of section 7508A. See ECF No. 36 at 6-9.
The Court goes on to observe:
The 2021 amendment to section 7508A(d) altered the mandatory extension, such that it would end 60 days after the earliest incident date or the date the declaration was issued, whichever date is later. See 26 U.S.C. § 7508A(d)(1)(B) (2021). The change in statutory text ensures that a mandatory 60-day extension is tacked on after a single date rather than after the last day of a multi-day (or multi-year) disaster declaration. Congress thus changed the statute to no longer have an indefinite automatic extension when a disaster lasts a long time. That Congress had to amend the statute implies that Congress changed the statute’s meaning; otherwise, Congress could have left the statute’s text as it was. Bufkin v. Collins. 604 U.S. 369, 386 (2025) (“[W]e ordinarily [*16] presume that when Congress [amends a statute], it intends its amendment to have real and substantial effect.”
Examples of potential taxpayer relief granted under this section include:
- Suspension of interest assessment on underpayment of tax
- Suspension of penalty assessments
- Extended periods for filing claims for refunds
- Responding to IRS notices
So, what does this mean for taxpayers? The decision has significant implications for interest and penalty assessments on income tax, employment tax, excise tax and estate and gift tax returns assessed during the period from January 1, 2020, to July 10, 2023. For example, refund claims may be able to be filed by taxpayers who paid interest on assessments related to the timing of lost compensation deductions due to the receipt of employee retention credits offered by the government during certain periods of the COVID-19 disaster.
But taxpayers have a limited window of opportunity to act, and higher courts may still have a judicial say in the final outcome since the IRS may appeal Kwong decision. Those benefiting from the Claims Court decision who have already paid interest or penalties may want to consider filing for a refund of those assessments. However, claims may need to be filed before July 10, 2026 – even those that were previously believed to have been barred by the statute of limitations. Time may be of the essence.
Do not hesitate to contact your Schneider Downs tax consultant for more information to discuss your specific facts and circumstances.
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