IRS Refund Opportunity for Taxes Paid During the Pandemic

Understanding the COVID-Era IRS Interest and Penalty Dispute

The issue stems from a law Congress passed in 2019 known as IRC Section 7508A.

The law was designed to automatically postpone certain tax deadlines when a federally declared disaster occurs. When COVID-19 was declared a national emergency on March 13, 2020, those provisions came into play.

The national emergency remained in effect until May 11, 2023, a much longer period than Congress likely envisioned when the legislation was written. According to recent court decisions, the IRS may have improperly continued charging interest and penalties during portions of that disaster period.

The Court Cases Driving These Potential Refunds

Two major court cases are at the center of the controversy:

Abdo v. Commissioner

This Tax Court case concluded that the relief provisions under Section 7508A were automatic and should have applied broadly to taxpayers during the disaster period.

The court determined that the IRS may have improperly assessed certain penalties and interest that should have been suspended.

Kwong v. United States

The Kwong case went even further.

The IRS had imposed a one-year limit on the postponement period, but the Court of Federal Claims determined that the relief should have lasted throughout the entire COVID disaster declaration, from 2020 through July 10, 2023.

If that interpretation ultimately stands, taxpayers who paid penalties or interest during that period could be entitled to refunds.

Why This Matters to Real Estate Investors and Business Owners

Real estate investors and business owners are particularly likely to be affected because they often encounter situations that generate penalties and interest, including:

• Underpayment penalties
• Missed estimated tax payments
• Late filings
• Late payments
• Partnership and business return compliance issues

Nathan notes that many investors may have paid penalties or interest without realizing those amounts could now be disputed under these court rulings.

Depending on the circumstances, refunds could range from a few hundred dollars to several thousand dollars or more.

How to Determine If You’re Eligible

The first step is reviewing your IRS account transcripts.

Nathan recommends logging into IRS.gov and reviewing transcripts for:

• 2019
• 2020
• 2021
• 2022

You’re specifically looking for any penalties or interest assessed during the COVID emergency period. These transcripts provide the most reliable record of what was charged and paid.

Many taxpayers assume their tax returns contain all of this information, but transcripts often provide the most complete picture of penalties and interest assessments.

Filing a Protective Claim Before July 10, 2026

Because the litigation is still ongoing, taxpayers cannot simply request an immediate refund and expect payment.

Instead, taxpayers should file what’s known as a protective claim for refund using IRS Form 843.

A protective claim essentially tells the IRS:

“If the courts ultimately determine that these penalties and interest were improperly charged, I want to preserve my right to receive a refund.”

The key deadline is July 10, 2026. If a taxpayer fails to file by that date and the courts later rule in favor of taxpayers, they may permanently lose the ability to recover those funds.

What Happens After You File?

One of the biggest challenges is uncertainty.

The IRS has already appealed portions of the Kwong decision and continues to dispute the broader interpretation adopted by the courts.

As a result:

• Refunds are not guaranteed.
• The process could take years.
• Additional litigation is expected.
• The IRS may challenge individual claims.

That uncertainty is precisely why filing a protective claim is so important. It preserves your rights while the legal process plays out.

Should You Handle This Yourself?

While taxpayers can file Form 843 on their own, Nathan recommends working with a qualified tax professional.

A CPA can help:

• Review IRS transcripts
• Calculate potential refund amounts
• Prepare Form 843 properly
• Document supporting evidence
• Navigate future appeals if necessary

The more detail included in the claim, the stronger the taxpayer’s position may be if the IRS ultimately contests the refund request.

Listener Question: Can You Use a Short-Term Rental Before Placing It in Service?

The episode also addressed a listener question about short-term rental tax planning.

The Scenario

A listener is building a beach house that will operate as a short-term rental and wants to know whether she can use the property personally before officially placing it into service.

Specifically, she asked whether finishing construction in July, using the property personally in August, and then placing it into service in September would create problems.

The Short Answer: Be Careful

Thomas explained that personal use of more than:

• 14 days, or
• 10% of total rental days

can cause the property to be classified as a residence rather than a business property under Section 280A.

When that happens, rental losses may be limited and cannot necessarily be used to offset W-2 income or other active income sources.

For investors hoping to take advantage of strategies like cost segregation and bonus depreciation, exceeding the personal-use limits can significantly reduce the tax benefits available.

Working Days vs. Personal Days

Nathan pointed out an important distinction.

Time spent actively working on the property may not count as personal-use days. For example:

• Preparing the property for guests
• Managing renovations
• Coordinating contractors
• Setting up operations

may qualify as working days rather than personal vacation days.

However, simply enjoying the property before placing it into service could jeopardize the intended tax strategy.

Key Takeaways

If you paid IRS penalties or interest between 2020 and 2023, now is the time to investigate whether you may be eligible for a future refund.

Here’s what you should do:

1. Review your IRS transcripts for 2019–2022.
2. Identify any penalties or interest assessed during the COVID emergency period.
3. Consult with a tax professional.
4. File a protective claim using Form 843 if appropriate.
5. Do so before July 10, 2026.

While the outcome of the litigation remains uncertain, preserving your rights now could position you to receive a refund if taxpayers ultimately prevail.

For real estate investors and business owners, the potential recovery may be substantial enough to justify taking action before the deadline closes.