Taxpayers that paid underpayment interest or failure-to-file or failure-to-pay penalties between January 20, 2020, and July 10, 2023, may have viable refund claims. In some cases, the potential recoveries are substantial, but refund statutes of limitation are running and may expire on a rolling basis. National attention has accelerated around this issue, including a recent Wall Street Journal article quoting McDermott Will & Schulte Tax Controversy Partner Shawn O’Brien. O’Brien observed that “[t]here’s potentially a sizable number” of taxpayers who still have opportunities available in seeking refunds and amending tax returns to get money back. However, he also noted, “[e]very day that goes by, it would be a missed opportunity.”
In our prior coverage, we discussed the US Court of Federal Claims’ decision in Kwong v. United States, in which it held that the 2019 version of Internal Revenue Code § 7508A applied to the COVID-19 federally declared disaster, resulting in a mandatory postponement period until the end of that disaster (plus 60 days). Under Kwong, federal income, estate, gift, employment, and excise tax payment deadlines falling within the disaster period were effectively extended to July 10, 2023. Because underpayment interest and certain penalties run from the payment due date, a postponement would negate the accrual of interest and penalties during the disaster period.
Taxpayers potentially eligible for refunds include those that:
- Paid underpayment interest that accrued between January 2020 and July 2023 (the disaster period)
- Entered installment agreements during the disaster period and paid interest that accrued on those installment payments
- Incurred failure-to-file or failure-to-pay penalties that accrued during the disaster period
- Made estimated tax adjustments resulting in interest assessments
- Are currently under Internal Revenue Service examination where interest computations are at issue.
Given the amounts publicly reported in pending cases, even a partial reduction of assessed interest may result in meaningful recoveries.
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