Recent federal court decisions have created a significant,
time-sensitive opportunity for taxpayers to potentially recover underpayment
interest and certain penalties that accrued during the COVID-19 national
disaster period. Taxpayers who paid interest or penalties attributable to the
period from January 20, 2020, through July 10, 2023, should evaluate their
eligibility for a refund.
What is the Basis for this Refund Opportunity?
The opportunity stems from two key court cases, Abdo v.
Commissioner (Tax Court 2024)[i]
and Kwong v. United States (Court of Federal Claims 2025).[ii] These courts interpreted the version of
Internal Revenue Code (IRC) Section 7508A(d) that was in effect during the
pandemic.
The courts held that the law provided a mandatory, self-executing suspension of
certain tax obligations for all taxpayers in a federally declared disaster
area. This relief was not at the discretion of the IRS. The suspension applied
to several acts, including the accrual of interest and penalties for failure to
file or pay. The courts concluded that the IRS was statutorily required to
disregard the entire COVID-19 disaster period for these purposes.
What is the Affected Period?
The courts in Abdo and Kwong established
that the mandatory disaster relief period began on January 20, 2020, and ended
on July 10, 2023. This 39-month period is the window during which underpayment
interest and certain penalties should not have legally accrued. Any such
amounts assessed and collected by the IRS for this period may have been
erroneous.
The Next Frontier: The Western Digital and Meta Cases
While the Abdo and Kwong cases primarily concerned
filing deadlines, their legal reasoning strongly suggests that the mandatory
relief also applies to interest accruing on existing tax liabilities. This
specific issue is now being actively litigated by major corporations.
In cases such as Western Digital Corp. v. United States (currently
before the Court of Federal Claims)[iii]
and Meta Platforms Inc. v. Commissioner (currently before
the U.S. Tax Court)[iv],
taxpayers are arguing that the Kwong decision requires the IRS to abate
millions of dollars in interest that accrued on their tax deficiencies during
the 39-month disaster period. The outcome of this ongoing litigation will be
critical in confirming the scope of this relief for all taxpayers.
Who Might Be Entitled to a Refund?
Any taxpayer—individual or business—who paid underpayment interest (under IRC §
6601) or penalties for failure to file or pay (under IRC § 6651) that accrued
during the 39-month disaster period may be eligible for a refund. This is
particularly relevant for taxpayers who paid liabilities arising from:
- An
IRS audit or examination
- A
partnership-level proceeding such as participation in a Conservation
Easement transaction
- A
litigation settlement or judgment
- A
late-filed return with a balance due
The rationale of
the Abdo and Kwong cases may also extend to
other interest and penalty computations, making a broad review of tax accounts
for this period advisable.
What Should Taxpayers Do Now?
The IRS is not expected to issue these refunds automatically. The government
has indicated its intent to appeal the Kwong decision, meaning the issue
is not yet finally settled. Therefore, taxpayers must act to preserve their
rights before the statute of limitations for filing a refund claim expires.
The most critical step is to file a protective claim for refund with the IRS. A
protective claim is a formal claim that preserves a taxpayer's right to a
refund that is contingent on a future event—in this case, the final, favorable
outcome of the ongoing Western Digital and Meta
Platforms litigation. Filing a protective claim is a crucial
step to ensure you can benefit if the courts ultimately rule in favor of
taxpayers.
We recommend that taxpayers review their records for any interest or penalty
payments made that are attributable to the period between January 20, 2020, and
July 10, 2023. If any such payments were made, filing a protective claim is a
crucial step to ensure you can benefit if the courts ultimately rule in favor
of taxpayers. Taxpayers are encouraged to speak to a tax professional about
whether they may be entitled to a refund of interest and how to preserve their
right to such refund.
Matthew S. Paolillo
Partner, Tax Controversy and Tax Planning Practice Group
770.379.1450
mpaolillo@mfcounsel.com
[i] Abdo v. Commissioner, 164 T.C. 148 (2024)
[ii] Kwong v. United States, No. 1:23-cv-00267 (Fed. Cl. 2025)
[iii] Western Digital Corporation & Subsidiaries v. United States,
No. 1:26-cv-00215 (Fed. Cl. Filed Feb. 6, 2026)
[iv] Meta Platforms, Inc. & Subsidiaries v. Commissioner, Docket No. 16081-25 (U.S Tax Court filed Dec. 4, 2025)
