Did the IRS Overcharge You? What Taxpayers Should Know About COVID-Era Interest and Penalties

Key Takeaways

• A November 2025 federal court ruling in Kwong v. United States found that the COVID-19 disaster declaration paused tax deadlines, and potentially interest accrual, from January 20, 2020, through July 10, 2023.
• Taxpayers who paid IRS interest or penalties that accrued during this period, including those who settled conservation easement cases, may be entitled to a refund or abatement.
• For tax years 2017 and prior (TEFRA cases), you must pay the full assessment before filing an abatement request. For tax years 2018 and later (BBA cases), the request can be filed once the settlement is reported on your current-year tax return.
• The IRS is unlikely to voluntarily refund interest or penalties given ongoing legal uncertainty.
• Deadlines for certain refund and abatement claims are time-sensitive. If you have received any correspondence from the IRS related to a tax dispute which overlapped the COVID-19 disaster declaration period, we recommend contacting your tax advisor or legal counsel immediately.

What Changed: A Court Ruling with Big Implications

In November 2025, the U.S. Court of Federal Claims issued a decision in Kwong v. United States which sent ripples through the tax controversy community. The court held the COVID-19 disaster declaration, which ran from January 20, 2020, through May 11, 2023, effectively paused the accrual of interest and certain penalties under I.R.C. Section 7508A(d). Because the COVID emergency was a presidentially declared major disaster, the statute required a 60-day extension from the end of the declaration, setting July 10, 2023, as the controlling deadline.

The IRS tried to argue its own regulations capped the postponement period at one year. The U.S. Federal Claims Court disagreed, finding the regulation misread the statute and contradicted its plain language. In short: the interest clock may have stopped ticking for more than three years, and taxpayers who paid accrued interest during the period may be entitled to a refund.

Why This Matters for Conservation Easement Cases

Conservation easement cases have unique timing characteristics which put many taxpayers squarely in the middle of this issue. Cases filed years ago often dragged through the Tax Court during the exact period the COVID disaster declaration was in effect. The IRS, when issuing post-settlement assessment notices, likely computed interest as if the pandemic emergency declaration didn’t exist.

To further complicate matters taxpayers invested in conservation easement partnerships experienced significant changes in the IRS audit procedures. For tax years 2017 and prior, the audit process runs through a TEFRA partnership proceeding. When a TEFRA proceeding concludes, the IRS issues a Notice of Computational Adjustment and a demand for payment. The IRS's failure to issue a notice on time creates a separate opportunity for an abatement request. Additionally, even when notices are issued on time, taxpayers may have a strong reasonable cause penalty abatement argument based on IRS delays, COVID disruptions, and the lack of clear guidance throughout those years.

The Bipartisan Budget Act (BBA) of 2015 established a centralized, entity-level audit regime for partnerships for tax years 2018 and later, replacing the TEFRA rules. The settlement adjustments are reported on the taxpayer's current-year tax return using Form 8978, which is triggered by receiving Form 8986 from the partnership. An IRS penalty abatement request can be filed once reporting occurs.

The Numbers Can Be Significant

To understand the magnitude, consider the case at the center of the Kwong ruling. A taxpayer facing a $53 million tax deficiency received an IRS bill exceeding $106 million, nearly half of which was underpayment interest. The taxpayer subsequently filed a complaint seeking a refund of $20.8 million representing the interest accrued during the COVID-19 disaster period. The dollar figures in conservation easement cases vary widely, but given the amount of time passed, the ratio of interest to underlying tax liability can be just as dramatic for all individual taxpayers.

What You Need to Do, and When to Do It

Abatement and refund claims are subject to strict deadlines, and those deadlines do not pause for inaction. If you have received any notice, bill or assessment from the IRS related to a conservation easement case, the clock is likely already running.

For tax years 2017 and prior, you must pay the full amount on the notice before an abatement claim can be filed. Once paid, gather your Notice of Amount Due, Notice of Computational Adjustment, Tax Court decision and evidence of payment to assist in the preparation and filing of the abatement request.

For tax years 2018 and later, an abatement request can be filed once the settlement amount has been reported on your current-year tax return and paid.

The Law Is Still Developing But There’s No Reason to Wait

The Kwong decision is significant, but it is unlikely to be the last word. Tax law on this issue is actively evolving across multiple courts and circuits. The IRS has given no indication they will voluntarily abate interest or penalties given the current legal uncertainty. Taxpayers need to be proactive, not reactive to preserve their claim.

The legal theory for penalty and interest relief during COVID-19 is well-grounded; the precedent is favorable, and the process for filing an abatement request is well-defined. Waiting for the law to fully settle may mean waiting past your deadline to act.

If you have resolved a conservation easement case and want to understand whether an IRS penalty abatement or interest refund may be available, contact the Moore Colson Tax team today. We can help assess your situation, gather the right documentation and advise on next steps.

FAQs

Does the Kwong ruling apply only to conservation easement cases?

No. The legal argument has broader implications and could apply to any assessment of interest or penalties between January 20, 2020, and July 10, 2023.

What is a conservation easement deduction, and why did so many cases end up in Tax Court?

A conservation easement is a legal agreement to restrict the development of real property, and is often times donated to a non-profit land trust, resulting in a charitable contribution deduction. The IRS challenged many of these arrangements, placing additional scrutiny on donations by syndicated partnerships, on the grounds the deductions were inflated or improperly structured. The ensuing wave of audits and litigation left thousands of taxpayers with unresolved cases stretching through the COVID years, creating the timing overlap at the center of this issue.

What does "reasonable cause" mean in an IRS penalty or interest abatement claim?

Reasonable cause is one of the recognized grounds for requesting IRS abatement and it generally means you exercised ordinary care, and could not comply, due to circumstances beyond your control. IRS delays, lack of clear guidance, and the disruptions caused by COVID-19 have all been cited as supporting reasonable cause arguments in recent abatement requests.

What happens if the IRS denies the abatement claim?

A denial is not necessarily the end of the road. Taxpayers can appeal an IRS denial or, in some cases, file a refund suit in federal district court or the U.S. Court of Federal Claims. Given the law in this area is still developing, preserving your claim now, even if it is not immediately resolved in your favor, is important.