Terry W. Kwong v. U.S., 179 Fed. Cl. 382 (2025)

Kwong v. United States held that, for taxpayers in a COVID-19 disaster area, the pre-2021 version of section 7508A could automatically postpone certain federal tax deadlines through the end of the COVID disaster period plus 60 days. Applying that rule, the Court of Federal Claims held that the taxpayer’s refund suit for penalties for 2007, 2010, and 2011 was timely even though it was filed more than two years after the IRS mailed notices of disallowance, because the section 6532(a) suit deadline was postponed until July 10, 2023. The court also held, however, that the IRS properly applied the taxpayer’s 2016 overpayment to his 2007 liability under section 6402(a), that any separate refund claim for that transferred overpayment was untimely under section 6511(a), and that the 2016 estimated tax penalty under section 6654 was valid and not excusable on a general reasonable-cause theory. [3]

General rule

The taxpayer sought refunds of penalties for tax years 2007, 2010, 2011, 2015, and 2016. The government argued that the refund suit for 2007, 2010, and 2011 was barred by the two-year filing deadline in section 6532(a)(1), because the IRS had mailed notices of disallowance in September and October 2020 and the suit was not filed until February 2023. [3]

Section 6532(a)(1) provides that a refund suit under section 7422(a) cannot be begun “after the expiration of 2 years from the date of mailing” of the notice of disallowance. The court accepted that this is the baseline rule, but focused on whether section 7508A altered that deadline during the COVID disaster period. [3]

The court emphasized that section 7508A applies to deadlines involving “any tax liability,” and the regulation under section 7508A expressly includes both filing a refund claim and bringing suit on a refund claim among the acts for which a period may be disregarded. Treas. Reg. §301.7508A-1(c)(1)(v) and (vi). [2]

Statutory framework and the court’s holding on COVID postponement

At the time relevant to the COVID disaster, section 7508A contained both a discretionary postponement rule and a mandatory disaster extension rule. Subsection (a) authorized the Secretary to disregard a period of up to one year for affected taxpayers in determining whether specified tax acts were timely performed and in determining interest, penalties, and refunds. [1]

The key provision in Kwong was the pre-2021 mandatory extension rule in section 7508A(d), which the court described as running from the earliest incident date in the disaster declaration through 60 days after the latest incident date. The court read that text according to its plain meaning and concluded that, for the COVID disaster in California, the mandatory postponement began January 20, 2020, and ended July 10, 2023, which is 60 days after the FEMA-designated end of the COVID incident period on May 11, 2023. [3]

That interpretation turned on the 2019 version of section 7508A(d), not the later amendment. The court held that the November 2021 amendment to section 7508A did not apply because Congress made that amendment applicable only to federally declared disasters declared after enactment, and COVID had been declared in early 2020.

Current section 7508A now uses a different mandatory extension rule. Subsection (e)(1) provides a mandatory 120-day extension ending 120 days after the later of the earliest incident date or the date the declaration was issued. That current text reflects later amendments and was not the rule applied in Kwong.

The court rejected the government’s argument that the older statute could not produce a multi-year postponement. It held that the statutory text was unambiguous and that the automatic extension under former section 7508A(d) was not capped by the one-year discretionary limit in section 7508A(a).

The court also rejected reliance on Treas. Reg. §301.7508A-1(g)(3)(ii), which states that the mandatory postponement period will not exceed one year. The court concluded that the regulation misread the statute to the extent it imposed a one-year cap on the mandatory extension under the pre-2021 version of section 7508A(d).

As a result, the taxpayer’s suit for 2007, 2010, and 2011 was timely because the section 6532(a) period was postponed through at least July 10, 2023, and the complaint was filed in February 2023.

Penalty issues for 2016 and overpayment transfer

The taxpayer also challenged the IRS’s use of his 2016 overpayment to satisfy his 2007 liability. The court held that section 6402(a) authorized the IRS to credit an overpayment against any outstanding internal revenue tax liability before applying it as a credit forward.

Section 7422(d) treats such a credit as a payment of the earlier liability at the time the credit is allowed. The court therefore held that once the IRS applied the 2016 overpayment to 2007, any refund claim had to be made as a claim relating to 2007, and the payment date was the date of the transfer in 2017.

Under section 6511(a), a refund claim generally must be filed within two years from the time the tax was paid if that is the applicable measuring period. Because the transfer occurred in 2017 and the taxpayer did not file the relevant abatement requests until 2020, the court held that any separate challenge to the transferred overpayment was untimely. The court noted the financial-disability tolling rule in section 6511(h)(2)(A), but the taxpayer had not shown it applied.

On the 2016 penalty itself, the court held that the IRS had assessed an estimated tax underpayment penalty under section 6654, not a delinquency penalty under section 6651. Section 6654(a) imposes an addition to tax for an individual’s underpayment of estimated tax.

The court distinguished section 6651 from section 6654. Under section 6651(a), reasonable cause can excuse certain failure-to-file or failure-to-pay penalties. But section 6654 does not contain a general reasonable-cause exception. Instead, the court noted only the specific statutory waivers in section 6654(e), including where the tax due is under $1,000, there was no prior-year tax liability, equity-and-good-conscience relief in unusual circumstances such as disaster, or retirement/disability. The taxpayer did not establish any of those exceptions.

The court further noted that section 6654(d)(1)(B)(i) generally measures underpayment by reference to whether the taxpayer paid at least 90% of the tax due during the year. Because the taxpayer had withheld only a small fraction of his 2016 liability, the court found no genuine dispute that the section 6654 penalty was properly imposed.

Practical significance of the case

Kwong is significant because it reads the pre-2021 version of section 7508A(d) broadly and literally. Under that reading, the COVID disaster declaration created an automatic postponement period from January 20, 2020, through July 10, 2023, for qualified taxpayers in disaster areas, and that postponement could affect refund-suit deadlines under section 6532 and potentially other tax deadlines tied to section 7508A.

Commentary in the sources notes that practitioners have viewed Kwong as potentially relevant not only to refund-suit timeliness but also to claims involving penalties and interest tied to deadlines falling within that COVID postponement window. Those discussions also note that section 6511 limitations periods remain a separate constraint for refund or abatement claims. In short, Kwong gave the taxpayer a meaningful win on timeliness for older penalty refund claims because of the COVID disaster postponement under former section 7508A(d), but it did not excuse an untimely refund claim for a transferred overpayment and did not disturb the IRS’s authority to impose and collect a section 6654 estimated tax penalty for 2016.