The IRS May Owe Your Clients Money from the COVID Period

By: Leo Unzeitig, J.D., CPA-San Antonio, and Kenneth Horwitz, J.D., CPA-Dallas

Recent court decisions have created a significant, and largely overlooked, opportunity to secure substantial refunds. Based on the mandatory disaster relief provisions in IRC Section 7508A, courts have affirmed that the entire United States was under a federally declared disaster caused by the COVID-19 pandemic from Jan. 20, 2020, to July 10, 2023. This has profound implications for interest and penalties assessed by the IRS during this period and creates a critical window for you to potentially provide value to your clients.

The legal foundation for this issue stems from a 2019 amendment to IRC Section 7508A, which made certain tax relief measures mandatory during a federally declared disaster. While the IRS attempted to limit this relief to shorter periods, the Tax Court in Abdo v. Commissioner, 162 T.C. 148 (2024), and the Court of Federal Claims in Kwong v. United States, No. 1:23-cv-00267 (Fed. Cl. Nov. 25, 2025) invalidated the IRS s position. These cases confirmed a period during which specific taxpayer protections were automatically in effect.

The rulings create several avenues for client refunds. First, any underpayment interest and related penalties (such as failure-to-file or failure-to-pay) that were assessed and collected for liabilities during this disaster period may be invalid and refundable. This is particularly relevant for clients who underwent examinations and paid assessments for these years. Second, the disaster relief provisions suspend the normal rules, like the 45-day rule under IRC Section 6611(e), that allow the IRS to avoid paying interest on overpayments. Consequently, any client who filed a return and received a refund during this period (even if the refund was issued quickly) may be entitled to overpayment interest that was never paid. At least one class action lawsuit has been filed seeking to recover those interest payments.

As a tax advisor, now is the time to evaluate whether protective refund claims are appropriate. It is unlikely that the IRS will voluntarily grant refund claims based on these theories in the absence of additional adverse precedent or administrative guidance. Nevertheless, the statute of limitations continues to run. Filing timely claims preserves your clients  rights and positions them to benefit if the law develops favorably. Waiting may permanently forfeit the opportunity, regardless of the merits.

Abdo and Kwong may also have important implications in the collection context. The IRS could be attempting to collect penalties and interest from your clients that were assessed in violation of the mandatory disaster relief provisions. Practitioners should carefully review account transcripts to determine whether amounts currently being pursued are legally valid. These cases provide a strong basis to challenge improper accruals and, at minimum, to raise credible defenses in administrative proceedings.

Importantly, this issue does not apply solely to refund opportunities. IRC Section 7508(a)(1), which is incorporated by reference into Section 7508A, suspends the time for performing virtually every time-sensitive act under the Internal Revenue Code during a federally declared disaster. This includes:

• Filing returns of income, estate, gift, employment and excise taxes;
• Paying any income, estate, gift, employment or excise tax or installment;
• Filing petitions with the Tax Court or notice of appeal therefrom;
• Filing claims for credit or refund;
• Bringing refund suits;
• Assessment of tax by the IRS;
• Giving or making a notice and demand for payment;
• Collection actions;
• Bringing suit by the United States in respect of any liability; and
• Any other act permitted by the internal revenue laws specified by the IRS.

As a result, the COVID-19 disaster period may have suspended not only filing and payment deadlines, but also statutes of limitation on assessment under IRC Section 6501, limitation periods for refund claims under IRC Section 6511, collection limitation periods, and procedural deadlines affecting litigation and administrative remedies. The scope of potentially affected items is therefore significantly broader than penalties and overpayment of interest alone.

Of course, significant uncertainty remains. For example:

• Does the mandatory relief apply only to obligations that arose during the disaster period, or does it also suspend interest and penalties that accrued during that period on liabilities from earlier tax years?
• Did the disaster relief suspend the statute of limitations on assessment under IRC Section 6501, thereby extending the IRS s time to audit returns?
• Will filing a claim for refund trigger a retaliatory audit from the IRS?
• How does the relief interact with existing closing agreements and/or installment agreements that cover liabilities accrued during the disaster period?
• Will Congress change this retroactively by statute?

Until these questions are resolved, practitioners should proceed thoughtfully and monitor developments closely. The potential amounts at stake are substantial, and early action may prove decisive.