Key Points

• New Tax Court Ruling Limits Pandemic Penalty Relief. In Bowen v. Commissioner, the Tax Court held that only deadline-related penalties qualify for refunds under Internal Revenue Code Section 7508A, excluding accuracy-related penalties.
• Taxpayers Should Still File Protective Refund Claims. Despite the narrowed scope, taxpayers who paid penalties or interest during the COVID-19 disaster should file claims to preserve their rights while appellate courts resolve the issue.
• Appellate Courts Will Have the Final Say. Key questions about the breadth of Section 7508A relief remain unresolved, including the pending government appeal of Kwong v. United States. Final answers may take several years.

A recent Tax Court ruling narrows the scope of pandemic-era tax relief available to millions of taxpayers who may be entitled to refunds or abatements of IRS penalties and interest assessed during the COVID-19 disaster period.

In Bowen v. Commissioner, the court distinguished accuracy-related penalties from deadline-related penalties, holding that only the latter qualify for the protections of Internal Revenue Code Section 7508A. As a result, refund and abatement claims filed by many Americans may be subject to this more limited interpretation by the IRS.

We previously discussed the implications of Kwong v. United States and Abdo v. Commissioner (found here and here) This alert addresses how Bowen limits those earlier holdings.

Background

In 2024, the Tax Court held in Abdo v. Commissioner that the postponement provisions found in Section 7508A are mandatory and self-executing.

Last year, the Court of Federal Claims held in Kwong v. United States that federal tax deadlines were postponed under Section 7508A(d) between January 20, 2020 (the date President Trump identified as the start of the COVID-19 disaster period) and July 10, 2023 (60 days after the date President Biden ended the disaster period).

Read together, Abdo and Kwong allowed millions of taxpayers additional time to file refund claims for interest or penalties assessed and paid between January 20, 2020 and July 10, 2023. The IRS has appealed Kwong. That appeal is still pending, and we do not expect that it will be resolved until at least 2027, so the breadth of relief remains subject to change.

Adding Bowen v. Commissioner

Last week, the Tax Court issued an order narrowing the scope of relief available in Kwong refund cases. In Bowen v. Commissioner, the taxpayer argued that the IRS should not have assessed accuracy-related penalties during the COVID-19 pandemic relief period. The Tax Court disagreed, distinguishing accuracy-related penalties stemming from underreporting tax from deadline-related penalties arising from failures to pay tax or file returns. As a result, Bowen holds that deadline-related penalties — such as failure to timely pay taxes or failure to timely file returns — are the only cognizable claims under Section 7508A.

Bowen plainly narrows the scope of relief granted under Section 7508A. But in doing so, it appears to contravene the goal of Section 7508A, which was to prevent taxpayers from being penalized during a natural disaster. At the same time, if the goal of Section 7508A was to provide taxpayers with additional time to meet their filing and payment obligations, then limiting relief to penalties based on deadlines — rather than also including penalties based on the amount of tax shown on a return — falls in line with that purpose.

As with Kwong and the myriad other cases addressing different aspects of Section 7508A — such as whether penalties originally assessed before the pandemic relief period and the related interest are subject to additional penalty and interest accrual during the pandemic relief period — the final answer will be determined by the Courts of Appeals and, perhaps, the Supreme Court.

The Takeaway

Taxpayers should continue to file protective refund claims, if still timely, and protective claims for abatement of penalties and/or interest that may be covered by Section 7508A.

Without clarification from the courts, these issues will remain undecided. But without a timely filed refund claim, or request for abatement, taxpayers may miss out on an opportunity regardless of the outcome.

The appellate process is not known for expediency, so we expect it will take a few years for the courts to sort out these issues. In the meantime, protective refund claims allow taxpayers to wait for these court decisions without running afoul of a ticking statute of limitations.

*Brooklynn Scott is currently a Law Clerk at Fox Rothschild.

For more information, please contact Matthew D. Lee at mlee@foxrothschild.com, Brian C. Bernhardt at bbernhardt@foxrothschild.com, Jonathan M. Wasser at jwasser@foxrothschild.com or Brooklynn Scott at brooklynnscott@foxrothschild.com.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.