Tax Court Pushes Back On Some Kwong-Related COVID Penalty Claims

A caller U.S. Tax Court bid is causing a stir, pinch immoderate practitioners suggesting it could importantly limit taxpayers’ expertise to retrieve penalties and liking assessed during the COVID-19 pandemic. But the fallout whitethorn not beryllium rather that simple.

In Bowen v. Commissioner, the tribunal did not determine whether national taxation deadlines were automatically postponed during the COVID-19 disaster period. Instead, it assumed that they mightiness person been—and ruled that the hold would not swipe retired the accuracy-related penalties astatine issue.

Background

The taxpayers, Suzanne and Kenton Bowen, revenge a petition successful Tax Court successful 2024 aft the IRS assessed further taxation for 2016 on pinch a 20% accuracy-related penalty, alleging that the return reflected negligence aliases disregard of the taxation rules.

A announcement of deficiency sets retired the IRS's determination that the payer owes further taxation and often includes immoderate projected penalties. After the announcement is mailed, the payer mostly has 90 days (150 days if addressed extracurricular the United States) to record a petition pinch the U.S. Tax Court. Filing a timely petition allows the payer to person the conflict heard by the Tax Court earlier paying the projected deficiency—which is what happened here.

Suzanne Bowen was later dismissed from the lawsuit for deficiency of jurisdiction. The IRS had moved to disregard her connected the grounds that it had not issued a announcement of deficiency—or made different determination concerning her 2016 taxation year—that would let her to invoke the Tax Court’s jurisdiction.

That near Kenton Bowen arsenic the petitioner successful the original lawsuit (the lawsuit is portion of a group of 4 related cases involving Bowen). Three of the notices of deficiency included accuracy-related penalties. In the 4th case, the IRS added the punishment by amending its answer. The cases person generated respective orders, but only 1 straight addresses the taxpayers’ COVID-19 alleviation argument.

The Pandemic Relief Argument

On July 17, 2026, the petitioners revenge a mobility asking for support to amend the petition. They wanted to adhd an statement that they were not liable for penalties and liking assessed during the COVID-19 disaster period. Their mentation relied principally connected 2 cases: Abdo v. Commissioner and Kwong v. United States.

In Abdo, decided successful 2024, the Tax Court concluded that the mandatory disaster alleviation proviso past recovered successful conception 7508A(d) of the taxation codification applied an automatic postponement period, making the taxpayers’ petition timely.

Then, in Kwong, the U.S. Court of Federal Claims concluded that the mandatory postponement play associated pinch the COVID disaster ran from January 20, 2020, done July 10, 2023—60 days aft the disaster play ended. Anticipating a flood of protective refund claims, the IRS opened a portal to make it easier to handle them.

Congress later amended conception 7508A connected November 15, 2021, changing the look for disaster-related postponements going forward. The amended type mostly results successful overmuch shorter postponement periods. But successful Kwong, Judge Meyers ruled that the 2021 alteration did not use retroactively to the COVID-19 disaster play because the pandemic disaster declaration began earlier the rule was changed. The authorities has appealed Kwong.

The taxpayers successful Bowen sought to usage those decisions to situation conception 6662 accuracy-related penalties and liking connected to the COVID-19 period.

Judge Ronald L. Buch didn’t agree, denying their motion. But it wasn’t a wholesale nary to Kwong and Abdo. Instead, the Tax Court held that a payer could not usage a pandemic-related deadline hold to debar an accuracy-related penalty. The tribunal besides declined to see the taxpayer’s situation to liking but for jurisdictional reasons, not because it ruled that pandemic alleviation could ne'er use to interest.

A Basic Procedural Problem

The mobility grounded for different reasons—notably ,it was flawed since the taxpayers did not connect the projected amended petition. Judge Buch wrote that the tribunal could person denied the mobility connected that basis. But he nevertheless considered whether the amendment would beryllium futile anyhow (courts whitethorn contradict support to amend erstwhile the projected caller declare would neglect moreover if it had been decently pleaded).

Judge Buch turned to the statute, writing: “More simply stated, conception 7508A extends deadlines.”

But extending deadlines doesn't needfully destruct each penalties. Judge Buch concluded that moreover if conception 7508A extended a applicable deadline, the hold would person nary effect connected the accuracy-related penalties astatine rumor successful the case.

The tribunal distinguished accuracy-related penalties from liabilities that dangle connected timing. A failure-to-file penalty, for example, is mostly triggered by a taxpayer’s nonaccomplishment to record a return by its owed date. A failure-to-pay punishment mostly depends connected whether the payer paid by the required date. Those are deadline-based penalties. Extending aliases disregarding a play of clip tin straight impact whether they apply.

An accuracy-related punishment is different. Giving a payer further clip to record does not ordinarily alteration whether the return understates taxation aliases contains a negligent reporting position.

Section 6662 penalties—those astatine rumor successful Bowen—generally enforce a punishment adjacent to 20% of the information of an underpayment attributable to specified conduct, including negligence, disregard of rules aliases regulations, important understatements of income taxation and definite valuation misstatements. Those penalties are tied to an underpayment, not simply to a missed deadline.

The Court Did Not Resolve The Interest Question

The petitioners besides sought to situation the liking assessed during the alleged COVID-19 postponement period. But the Tax Court did not determine whether conception 7508A would yet trim aliases destruct that interest. Instead, it concluded that it lacked jurisdiction to see the rumor astatine this shape of the deficiency cases.

The Tax Court is simply a tribunal of constricted jurisdiction. In a deficiency case, the tribunal mostly determines the magnitude of the taxation deficiency. Under conception 6601(e), liking is not treated arsenic taxation for that purpose.

A payer whitethorn inquire the Tax Court to reappraisal the IRS’s computation of liking nether conception 7481(c), but ordinarily only aft the tribunal has entered a determination determining the deficiency and the different statutory prerequisites person been satisfied. Here, nary last decisions person been entered successful the case—the proceedings isn’t moreover scheduled to statesman until September. Judge Buch truthful concluded that the tribunal did not presently person jurisdiction complete the computation of interest.

What The Order Did Not Decide

While Judge Buch gave a motion to the guidance he would determine the case, he wrote: “For purposes of deciding the pending Motion, we request not determine the precise scope of alleviation afforded by conception 7508A.”

That condemnation makes it clear that this isn’t a wholesale ruling connected pandemic-era punishment and liking refunds.

The tribunal did not determine whether Kwong correctly identifies the afloat COVID-19 disaster postponement period. It did not find which refund declare deadlines whitethorn person been extended. It did not determine whether deadline-based penalties assessed during that play must beryllium abated. And it did not determine connected the merits whether liking stopped accruing astatine immoderate constituent during the period.

Instead, while conceding that nether conception 7508A, “time-based liabilities, specified arsenic liking and deadline-based penalties, mightiness beryllium deferred aliases rendered inapplicable,” the tribunal held that a deadline hold would not destruct accuracy-related penalties because those penalties are not based connected tardiness. The tribunal besides noted that it presently lacked jurisdiction to measure aliases adjudicate interest.

How Much Weight Does It Carry?

The July 21 bid is not a published Tax Court sentiment designated arsenic a T.C., memorandum, aliases summary opinion. On its face, it’s simply an bid denying time off to amend pleadings successful cases that stay pending. That intends it is not the aforesaid arsenic a final, precedential decision.

But that does not mean that the court’s reasoning is irrelevant. The bid offers a look astatine really astatine slightest 1 Tax Court judge would use conception 7508A to accuracy-related penalties. And that should transportation immoderate weight pinch taxpayers and practitioners. Kwong and Abdo are not slam-dunk cases for punishment abatement.

(And Kwong itself whitethorn not be. The pending entreaty will apt person overmuch much to opportunity astir the larger conflict astir the abatement of penalties during the pandemic.)

What Comes Next

Claims involving accuracy-related penalties look a basal problem: Those penalties originate from an underpayment aliases reporting position, not from missing a deadline. The Tax Court’s reasoning successful Bowen suggests that moreover a wide COVID-19 postponement play would not make those penalties disappear.

But Bowen does not propose that claims involving failure-to-file penalties, failure-to-pay penalties, aliases different liabilities straight connected to a postponed deadline would not beryllium taxable to abatement. Nor does it resoluteness the merits of claims involving interest.

For now, Bowen appears to constrictive the way to alleviation for COVID-era claims. Whether it yet narrows the broader scenery of COVID-era taxation claims remains a mobility for the appellate courts.

As for different national income taxation penalties, the IRS precocious announced that it will automatically providing definite punishment alleviation during return processing to taxpayers pinch a history of filing and paying connected time.. You tin publication more here.