Court Decisions Provide Potential Relief From Interest, Penalties Accrued During the COVID 'Federally Declared Disaster'

When a major disaster strikes — be it a hurricane, a flood or even a once-in-a-lifetime pandemic — tax deadlines are usually the last thing on people’s minds. But as anyone who has confronted a missed tax filing or payment deadline can attest, the adverse financial consequences of missed deadlines, from additional interest and tax penalties to lost opportunities to contest a deficiency or seek a refund, can be severe. Recognizing the significant hardships these disaster events impose, the U.S. Congress enacted special tax relief provisions for individuals and businesses affected by events classified as “federally declared disasters.”

First came the “Stafford Act” of 1988, which authorizes the president to declare major disasters, triggering a range of federal assistance programs. The designation of a federally declared disaster is the linchpin for a particular form of tax relief under section 7508A of the Internal Revenue Code. Enacted 10 years after the Stafford Act, that code section authorizes the IRS to postpone tax deadlines in the event of such a disaster. Most commonly, we’ve seen examples of this in recent years in geographic areas affected by severe hurricanes, floods and wildfires, where extended tax filing deadlines have eased compliance burdens during periods of significant disruption.

Although historically disaster relief under section 7508A was limited in geographic scope and duration, this changed on March 13, 2020, when President Donald Trump declared the COVID-19 pandemic a disaster for all U.S. states and territories. The period for disaster relief commenced on the earliest declared incident date and ended 60 days after the latest declared incident date. Because various states declared disasters prior to the officially declared federal disaster, the earliest incident date for the pandemic was set as January 20, 2020. The pandemic disaster period was by far the longest federally declared disaster ever treated as eligible for section 7508A relief, ending nearly 3 1/2 years later on July 10, 2023 — 60 days after President Joe Biden formally ended the disaster declaration on May 11, 2023.

In 2021, the IRS sought to limit the scope of pandemic-related relief under section 7508A by promulgating a regulation purporting to apply retroactively and to make such relief nonmandatory. However, in Abdo v. Commissioner, a 2024 Tax Court case of first impression involving a petition filed after the ordinary statutory deadline, the court invalidated the regulation. Applying Chevron, USA Inc. v. Natural Resources Defense Council, Inc., the court concluded the regulation was not entitled to deference because the statutory language of section 7508A is “unambiguous.” The court also held that because Congress intended for the relief for taxpayers in federally declared disaster areas be mandatory and automatic rather than discretionary, the filing deadline was postponed and the petition was timely.

A year later in Kwong v. United States, the Court of Federal Claims took a broader view of section 7508A, concluding that COVID-era disaster declarations tolled certain federal tax deadlines through July 10, 2023. That approach went beyond Abdo, which involved only a short extension period. Applying the tolling framework, Kwong extended the statute of limitations for refund suits — ordinarily due within two years after denial of an administrative refund claim — through July 10, 2023, making the taxpayer’s filing timely.

Although Kwong is binding only in the Court of Federal Claims, that decision — together with Abdo and the very recent stipulated Tax Court decision in Mayronne v. Commissioner, which disallowed statutory interest through July 10, 2023 — suggests that the IRS may have difficulty prevailing against taxpayers invoking section 7508A pandemic relief, reflecting a judicial reluctance to defer to IRS efforts to narrow the scope of congressionally mandated disaster relief.

In light of the courts’ interpretation of the availability of section 7508A relief, taxpayers should seriously consider several potential benefit scenarios in the following situations:

• For unresolved audits involving a proposed tax deficiency accruing interest over any portion of the January 20, 2020, through July 10, 2023, tolling period, taxpayers should raise the interest issue as part of any resolution.
• After a deficiency has been assessed but remains unpaid, taxpayers should consider filing a claim for the abatement of that interest. Taxpayers with recently resolved Tax Court cases should reach out to their tax counsel to determine if this can be incorporated into the case.
• Where the tax deficiency and interest balance has been fully paid, taxpayers should consider filing a claim for refund of the interest, even if they do not dispute the tax adjustment.
• Taxpayers subject to certain unpaid time-based penalties (e.g., for late filing or payment) should consider filing a request for an abatement of that penalty. For penalties already paid, they should consider filing a claim for refund.

Where a refund suit might be the appropriate course of action, the Court of Federal Claims appears to present the most attractive litigating forum in light of the Kwong decision.

A final consideration to bear in mind is that the clock may be ticking for refund claims and suits relying on section 7508A because the Internal Revenue Code requires that administrative refund claims be brought within three years from the time a return was filed or two years from the time the tax was paid, whichever is later. Under the three-year rule, the latest a pandemic-era refund claim can be filed is July 10, 2026. If relying on the two-year rule instead, the time to file may be longer, depending on when the liability was paid.

Navigating the deadlines associated with pandemic-related relief requires careful attention to procedural requirements and can implicate strategic considerations. In assessing whether to pursue an abatement or refund claim, taxpayers should also consider the amount potentially recoverable. This is particularly important given the significant rise in interest rates beginning in 2022, reaching 8% by 2024 with higher rates applying to large corporate overpayments, since accrued interest and penalties can substantially increase the overall liability in many cases. Taxpayers who incurred penalties or interest during the pandemic relief period should consider consulting experienced tax controversy counsel to evaluate their eligibility to file abatement requests or refund claims and to help navigate the myriad complexities in doing so.

Reprinted with permission from the April 28, 2026, edition of The Legal Intelligencer © 2026 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.