2026 IRS Penalty Abatement Letter: File by July 10

2026 IRS Penalty Abatement Letter: File by July 10

For tax professionals serving clients in 2026, the 2026 IRS penalty abatement letter opportunity represents a critical deadline. The July 10, 2026 filing deadline stems from the Kwong v. United States ruling. This ruling creates potential refunds for millions affected by COVID-era penalties. Tax advisors who act now can deliver significant relief to their clients while building stronger advisory relationships.

Table of Contents

• Key Takeaways
• What Is the Kwong v. United States Ruling and Why Does It Matter?
• Who Qualifies for COVID-Era Penalty Abatement in 2026?
• How Do You File the 2026 IRS Penalty Abatement Letter Using Form 843?
• What Penalties and Interest Are Eligible for Refunds?
• Why Should Tax Professionals File Protective Claims Despite IRS Appeals?
• How Can Tax Professionals Identify Eligible Clients?
• Uncle Kam in Action: Turning Penalty Relief Into Advisory Revenue
• Next Steps
• Frequently Asked Questions
• Related Resources

 

 

Key Takeaways

• Tax professionals must file protective claims by July 10, 2026 for COVID-era penalties.
• The Kwong ruling covers penalties from January 20, 2020 through July 10, 2023.
• Use IRS Form 843 and reference Section 7508A(d) explicitly in claims.
• Filing preserves client refund rights despite ongoing IRS appeals in 2026.
• This opportunity allows tax pros to demonstrate advisory value beyond compliance.

What Is the Kwong v. United States Ruling and Why Does It Matter?

The Kwong decision represents a watershed moment for tax advisory professionals and their clients. In November 2025, the U.S. Court of Federal Claims ruled that the COVID-19 pandemic qualified as a federally declared disaster under Internal Revenue Code Section 7508A(d). As a result, the court determined that tax filing and payment deadlines were postponed during the entire disaster period plus the mandatory 60-day extension. This pushed the effective deadline to July 10, 2023.

Legal Foundation of the Kwong Ruling

The legal basis centers on IRC Section 7508A(d). This provision requires the IRS to postpone tax deadlines during presidentially declared disasters. The COVID-19 national emergency was declared on January 20, 2020. It continued through May 11, 2023. Therefore, the court reasoned, all tax deadlines during this period should have been automatically postponed.

Since no taxes were technically due during this window, the IRS likely had no legal authority to assess penalties and interest. This created a potential pathway for refunds. The ruling affects failure-to-file penalties, failure-to-pay penalties, and estimated tax penalties assessed during those years. It also extends to interest that began accruing during the disaster period.

The IRS Response and Ongoing Appeals

The IRS officially appealed the Kwong decision in May 2026. The Treasury Department has voiced strong disagreement with the ruling. In an Action on Decision memo issued May 20, 2026, the IRS stated it would continue fighting to avoid paying out billions in potential refunds. The agency also referenced the Abdo v. Commissioner case as part of its broader legal strategy.

Despite the appeal, tax professionals should advise clients to file protective claims immediately. The three-year statute of limitations creates an absolute deadline of July 10, 2026. Missing this date will likely forfeit any future refund opportunity, regardless of how the appeals process resolves.

Impact on Tax Professional Practice

For tax professionals, the 2026 IRS penalty abatement letter opportunity creates several strategic advantages. First, it demonstrates proactive advisory value beyond annual compliance work. Second, it opens conversations about ongoing tax planning strategies and advisory services. Third, successfully securing refunds builds trust and client loyalty.

The ruling affects a broad cross-section of taxpayers. This includes individuals, small businesses, large corporations, estates, and trusts. Penalties related to income tax, employment tax, estate tax, gift tax, and excise tax may all qualify. Even international information return penalties could be eligible for abatement.

Who Qualifies for COVID-Era Penalty Abatement in 2026?

Eligibility for the 2026 IRS penalty abatement letter extends to virtually any taxpayer assessed penalties during the COVID-19 disaster period. National Taxpayer Advocate Erin M. Collins confirmed in an April 30, 2026 blog post that “impacted taxpayers represent a broad cross-section of the public.” The scope is wider than many tax professionals initially assumed.

Individual Taxpayers

Individual taxpayers who filed 2019, 2020, 2021, or 2022 returns late may qualify. Those who made late payments on these returns are also eligible. Additionally, individuals who failed to make quarterly estimated tax payments during the disaster period could claim refunds. The key criterion is whether penalties or interest were assessed between January 20, 2020 and July 10, 2023.

Business Entities

Business owners choosing between LLC and S corporation structures may have faced complex filing and payment timelines during the pandemic. Sole proprietors, partnerships, S corporations, and C corporations all potentially qualify. Employment tax penalties assessed during this period are eligible. This includes penalties for late payroll tax deposits and Form 941 filings. Small businesses hit hardest by pandemic disruptions may see substantial refunds.

Estates, Trusts, and Other Entities

Estate and gift tax penalties assessed during the disaster period qualify for abatement. Trusts with late filings or payments during these years should file protective claims. Even taxpayers who filed late international information returns may qualify. These can carry significant penalties even when no tax is due. The Form 5471, Form 8938, and FBAR penalties could all potentially be abated.

Previously Denied Abatement Requests

Taxpayers who previously requested penalty abatement and were denied should file new protective claims. The Kwong ruling creates a new legal basis that did not exist when earlier requests were submitted. However, tax professionals should verify whether prior abatement already eliminated the penalties before filing.

Taxpayer Category	Eligible Penalties	Potential Refund Impact
Individuals	Failure to file, failure to pay, estimated tax	Hundreds to thousands per year
Small Businesses	Payroll tax, income tax, information returns	Thousands to tens of thousands
Estates/Trusts	Estate tax, gift tax, fiduciary return penalties	Thousands to hundreds of thousands
International Filers	Form 5471, FBAR, Form 8938 penalties	Ten thousand to millions

How Do You File the 2026 IRS Penalty Abatement Letter Using Form 843?

Filing the 2026 IRS penalty abatement letter requires precise execution. Form 843 is titled “Claim for Refund and Request for Abatement.” Tax professionals should treat each filing as a protective claim. This means the IRS will hold the claim pending final resolution of the Kwong appeals. If the ruling stands, clients receive refunds. If overturned, no harm done.

Step 1: Gather Client Documentation

Before completing Form 843, obtain the client’s IRS account transcripts. These transcripts show all penalties and interest assessed during the COVID-19 disaster period. Taxpayers can access transcripts through their IRS Individual Online Account or by calling 800-908-9946. Transcripts typically arrive in five to ten calendar days if ordered by mail.

Review each transcript carefully. Look for transaction codes indicating penalty assessments. Common codes include TC 166 (failure to file), TC 276 (failure to pay), and TC 170 (estimated tax penalty). Document the date each penalty was assessed. If the assessment occurred between January 20, 2020 and July 10, 2023, include it in the claim.

Step 2: Complete Form 843 With Required Information

Form 843 requires specific information in several sections. In the header, enter the taxpayer’s name, address, and Social Security number or Employer Identification Number. In Part I, check the box for “Refund” and specify “Income Tax” as the type of tax.

In the explanation section (Line 7), include the following critical language:

• “This is a protective claim for refund of penalties and interest assessed during the COVID-19 disaster period.”
• “This claim is based on Kwong v. United States and IRC Section 7508A(d).”
• “Penalties were assessed between January 20, 2020 and July 10, 2023.”
• “Taxpayer requests abatement of all penalties and interest improperly assessed during the disaster period.”

List each affected tax year separately. For example: “2019 Form 1040, 2020 Form 1040, 2021 Form 1040.” Specify the penalty amounts for each year based on the transcript review.

Step 3: Mail the Form (Paper Filing Required)

Form 843 for COVID-era penalty abatement must be submitted on paper. Electronic filing is not available for these protective claims. Mail the completed form to the IRS address where the taxpayer normally files their return. For most individual taxpayers, this corresponds to the address listed in the IRS Form 1040 instructions.

Consider using certified mail with return receipt requested. This provides proof of timely filing if questions arise later. The postmark date determines whether the filing meets the July 10, 2026 deadline. Do not wait until the last minute, as postal delays could jeopardize the claim.

Step 4: Set Realistic Client Expectations

Inform clients that filing Form 843 does not guarantee a refund. The IRS is actively appealing the Kwong decision. The appeals process may take years to resolve. However, failing to file eliminates any chance of a refund if the ruling ultimately stands.

Explain that the protective claim essentially tells the IRS: “Hold this claim until the legal issues are resolved.” If the court ruling is affirmed, the client will have preserved their right to claim a refund. If the IRS prevails on appeal, the claim simply gets denied. There is no downside to filing.

What Penalties and Interest Are Eligible for Refunds?

The scope of eligible penalties under the 2026 IRS penalty abatement letter opportunity is broader than many tax professionals initially realize. National Taxpayer Advocate Erin Collins outlined three main categories in her April 30, 2026 statement. Understanding these categories helps tax professionals identify which clients stand to benefit most.

Failure-to-File Penalties

The failure-to-file penalty is one of the IRS’s harshest assessments. For 2026, the penalty remains 5% of unpaid taxes per month, up to a maximum of 25%. This penalty applies when taxpayers file returns after the deadline without obtaining a valid extension.

Under the Kwong reasoning, any failure-to-file penalty assessed for returns due during the disaster period should be abated. For example, a 2019 return normally due April 15, 2020 fell within the disaster period. A 2020 return due April 15, 2021 also fell within the extended disaster window. Even 2021 and 2022 returns could qualify depending on when they were actually filed.

Failure-to-Pay Penalties

The failure-to-pay penalty accrues at 0.5% per month on unpaid taxes, also capped at 25%. This penalty applies when taxpayers file on time but do not pay the full amount owed. It also applies to installment agreement defaults during the disaster period.

Taxpayers on IRS payment plans during the COVID-19 period may have been charged reduced failure-to-pay penalties at 0.25% per month. Even these reduced penalties could qualify for abatement if assessed during the disaster period. Review each client’s payment history carefully to identify these opportunities.

Estimated Tax Penalties

Many self-employed taxpayers and business owners faced estimated tax penalties during the pandemic. These penalties apply when quarterly payments fall short of required amounts. The penalty is essentially interest charged on the underpayment for each quarter.

If quarterly payments were due during the disaster period (January 20, 2020 through July 10, 2023), the associated penalties may be abated. This includes estimated tax payments for 2019 (if extended), all 2020 quarterly payments, all 2021 quarterly payments, and 2022 quarterly payments through Q2 2023.

Interest Charges

Interest treatment under Kwong is more complex. Tax professionals should claim refunds for interest that began accruing during the disaster period. Some practitioners also argue that interest should not have accrued at all during the disaster period, even if the underlying liability arose earlier.

Additionally, taxpayers who made overpayments during the disaster period may be entitled to overpayment interest from the IRS. Normally, the IRS pays interest on refunds. If disaster period rules applied, the calculation period could extend, resulting in additional interest due to taxpayers.

Penalty Type	2026 Rate	Maximum	Kwong Eligibility
Failure to File	5% per month	25%	Yes, if assessed Jan 2020-July 2023
Failure to Pay	0.5% per month	25%	Yes, if assessed during disaster period
Estimated Tax	Varies by quarter	No cap	Yes, for quarters due during disaster
Reduced (Payment Plan)	0.25% per month	25%	Yes, if on plan during disaster period

Why Should Tax Professionals File Protective Claims Despite IRS Appeals?

 

 

Some tax professionals hesitate to file protective claims because the IRS is actively appealing the Kwong decision. However, this hesitation is misplaced. Glen Frost, managing partner of Frost Law, stated in May 2026: “Our advice to clients remains the same. The government’s appeal means the Kwong case enters a new and uncertain phase that may take years to resolve. Regardless of this step, taxpayers still face a short window to file a claim to protect potential refunds or abatements.”

The Statute of Limitations Creates a Hard Deadline

The statute of limitations for refund claims runs three years from the date the return was filed or two years from the date the tax was paid, whichever is later. For penalties and interest assessed in connection with returns filed near July 10, 2023, the statute expires on July 10, 2026. This deadline is absolute.

Tax professionals who fail to advise clients to file protective claims by this date may face malpractice exposure. If the Kwong ruling is ultimately affirmed and clients miss the deadline, they will have lost potentially substantial refunds due to their tax professional’s inaction.

No Cost, No Risk Strategy

Filing a protective claim costs nothing beyond the time to prepare Form 843 and postage. There are no filing fees. The IRS simply holds the claim in suspense pending resolution of the legal issues. If the government prevails on appeal, the claim gets denied. If the court ruling stands, clients receive refunds.

Jon Wasser, partner at Fox Rothschild, explained the protective claim strategy in May 2026: “You’re basically telling the IRS, ‘here’s a refund claim, put it on hold for now’ until the case has a final determination. If, after all litigation is complete and the IRS must issue refunds, you would have preserved your right to claim yours.”

Demonstrating Proactive Advisory Value

Beyond the legal strategy, filing protective claims demonstrates to clients that tax professionals are on top of emerging tax opportunities. Many taxpayers are unaware of the Kwong ruling and the potential for refunds. Tax professionals who proactively identify eligible clients and file claims show they provide value beyond basic compliance work.

This creates an opportunity to transition clients from transactional tax preparation relationships to ongoing advisory relationships. After successfully navigating the 2026 IRS penalty abatement letter process, clients are more likely to engage for comprehensive tax planning that prevents future problems and maximizes tax savings.

The Appeal Timeline

The IRS filed its appeal with the U.S. Court of Appeals for the Federal Circuit in May 2026. Based on typical appellate timelines, the case may not be decided until 2027 or later. If the government loses at the appellate level, it could petition for Supreme Court review. This could extend resolution into 2028 or beyond.

Meanwhile, the IRS must process protective claims and hold them in suspense. This administrative burden is substantial. However, it does not change the legal requirement for tax professionals to advise clients to file protective claims before the statute expires.

How Can Tax Professionals Identify Eligible Clients?

Identifying eligible clients for the 2026 IRS penalty abatement letter opportunity requires systematic review of client bases. Tax professionals should approach this as a client service initiative. The goal is to help every eligible client capture potential refunds before the July 10, 2026 deadline.

Review Tax Return Filing Dates

Start by reviewing when clients filed their 2019, 2020, 2021, and 2022 returns. Any return filed after the original due date (including extensions) during the disaster period potentially qualifies. For example, a 2019 return filed in late 2020 or 2021 would have been subject to failure-to-file penalties.

Also review clients who filed on time but made late payments. Even if the return was timely, failure-to-pay penalties assessed during the disaster period qualify for abatement. This is particularly common for self-employed individuals and small businesses with cash flow challenges.

Analyze IRS Notices and Correspondence

Review files for IRS notices received during 2020-2023. Common penalty assessment notices include CP14 (balance due), CP161 (second notice), and CP504 (urgent notice). These notices typically show penalty and interest amounts. If the notice is dated during the disaster period, the client likely qualifies.

Also look for notices related to estimated tax penalties. Form 2210 calculations and CP14 notices showing estimated tax penalties assessed for 2019-2022 all potentially qualify. Many self-employed clients received these penalties during the pandemic due to income volatility.

Order IRS Account Transcripts

For clients with potential eligibility, order IRS account transcripts for tax years 2019-2022. Transcripts provide the definitive record of penalties assessed, payment dates, and current balances. Transaction codes on the transcript reveal the specific penalty type and assessment date.

Transcripts can be obtained directly from clients who provide authorization. Alternatively, clients can retrieve their own transcripts through the IRS Individual Online Account portal. Transcripts are also available by calling the IRS automated line at 800-908-9946.

Create a Client Outreach Campaign

Consider sending an email or letter to all clients explaining the Kwong opportunity. Outline the basics: potential refunds for COVID-era penalties, July 10, 2026 deadline, and no cost to file. Offer to review their IRS transcripts and file protective claims if they qualify.

This proactive outreach demonstrates advisory value. It also protects tax professionals from potential malpractice claims. Documenting that clients were informed of the opportunity and deadline shows professionals fulfilled their duty. Whether clients choose to act becomes their decision.

Identification Method	What to Look For	Priority Level
Filing Date Review	Returns filed late during disaster period	High – likely substantial penalties
IRS Notice Analysis	CP14, CP161, CP504 dated 2020-2023	High – documented penalty assessments
Transcript Review	TC 166, TC 276, TC 170 codes during disaster	Critical – definitive eligibility proof
Payment History	Late payments on 2019-2022 liabilities	Medium – may qualify for abatement

Uncle Kam in Action: Turning Penalty Relief Into Advisory Revenue

Sarah Chen, EA, runs a boutique tax practice serving real estate professionals. In May 2026, she learned about the Kwong ruling and immediately recognized an opportunity. She reviewed her client roster and identified 47 clients who potentially qualified for COVID-era penalty abatements. Sarah sent a targeted email explaining the situation and offering to file protective claims for a flat $250 fee.

Within two weeks, 38 clients engaged Sarah to file Form 843 on their behalf. She ordered IRS transcripts for each client and systematically prepared protective claims. One client, a real estate investor named Michael Rodriguez, had been assessed over $8,200 in failure-to-file and failure-to-pay penalties for his 2020 and 2021 returns. Both returns were filed late in 2021 during the disaster period.

Sarah filed Michael’s Form 843 on June 15, 2026, well before the July 10 deadline. She documented the Kwong case citation and Section 7508A(d) reference clearly. While waiting for the IRS appeals to resolve, Sarah scheduled a tax planning meeting with Michael. During this meeting, she identified an additional $23,400 in annual tax savings through strategic use of cost segregation, short-term rental classification, and entity restructuring.

Michael engaged Sarah for ongoing monthly advisory at $800 per month. Over the next 12 months, Sarah delivered comprehensive planning that saved Michael $23,400 in taxes. She earned $9,600 in monthly advisory fees (12 months × $800). Her initial $250 Form 843 service generated a 38x return on the client relationship investment.

Across all 38 clients who engaged for Form 843 services, Sarah generated $9,500 in immediate revenue ($250 × 38). More importantly, 22 of those clients subsequently engaged for ongoing tax advisory services. This created an additional $176,000 in annual recurring revenue. Sarah’s proactive response to the Kwong ruling transformed her practice from compliance-focused to advisory-driven.

The key lesson: The 2026 IRS penalty abatement letter opportunity is not just about filing forms. It is about demonstrating proactive value, building trust, and creating pathways to deeper advisory relationships. Tax professionals who recognize this will significantly grow their practices in 2026 and beyond. Learn more about similar client success stories and how to implement systematic advisory processes.

Next Steps

The July 10, 2026 deadline for filing the 2026 IRS penalty abatement letter is rapidly approaching. Tax professionals should take immediate action to serve their clients and protect their practices. Here are critical next steps:

• Review all client files for 2019-2022 returns filed late or with late payments during January 2020-July 2023.
• Order IRS account transcripts for potentially eligible clients to verify penalty assessments and amounts.
• Download IRS Form 843 and prepare protective claims referencing Kwong v. United States and Section 7508A(d).
• Mail completed forms by certified mail before July 10, 2026 to preserve clients’ refund rights.
• Schedule follow-up planning meetings with eligible clients to explore comprehensive tax planning strategies for 2026 and beyond, including entity selection analysis supported by tools like the LLC vs S corporation tax comparison calculator.

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Frequently Asked Questions

What happens if the July 10, 2026 deadline for filing the penalty abatement letter is missed?

Missing the deadline likely eliminates clients’ opportunity for refunds. The statute of limitations is absolute. Once it expires, the IRS can refuse to consider claims even if the Kwong ruling is ultimately affirmed. Tax professionals who fail to advise clients of this deadline may face malpractice exposure. Protective claims should be filed for all potentially eligible clients before July 10, 2026.

Can clients file Form 843 themselves, or do they need a tax professional?

Clients can file Form 843 themselves. However, tax professionals add significant value by ordering transcripts, calculating exact penalty amounts, and using proper legal language referencing the Kwong decision and Section 7508A(d). Many clients lack the expertise to prepare effective protective claims. This creates a service opportunity for tax professionals.

What if a client already paid the penalties years ago?

Clients can still file for refunds even if they paid penalties in full years ago. The statute of limitations runs three years from the return filing date or two years from payment date, whichever is later. If the penalty was paid within the statute period, file Form 843 requesting a refund. If the ruling stands, the IRS will issue a refund check.

Does filing Form 843 trigger an audit or additional IRS scrutiny?

Filing Form 843 as a protective claim should not trigger audits. The IRS is holding these claims in suspense pending resolution of the Kwong appeals. The form simply preserves clients’ rights to claim refunds if the ruling stands. There is no evidence that filing Form 843 increases audit risk for properly prepared claims.

How long will it take to receive refunds if the Kwong ruling is affirmed?

The timeline is uncertain and depends on the appeals process. The case may not be finally resolved until 2027 or 2028. If the ruling is ultimately affirmed, the IRS would need to process millions of protective claims. Processing could take additional months or years after the legal issues are settled. Client expectations should be set around the extended timeline.

What should be done if a client has unpaid penalties from the disaster period?

Clients with unpaid penalties should still file Form 843 requesting abatement rather than refund. These clients do not face the same July 10, 2026 deadline since they have not yet paid. However, tax professionals should still advise filing protective claims promptly. This demonstrates due diligence and protects clients’ rights if circumstances change.

Can business entities claim refunds for employment tax penalties assessed during COVID-19?

Yes, employment tax penalties assessed during the disaster period potentially qualify. This includes penalties for late Form 941 filings and late payroll tax deposits. Small businesses that struggled with cash flow during the pandemic should review all employment tax penalties from January 2020 through July 2023. Form 843 should be filed for each affected quarter using the business’s EIN.

Related Resources

• Tax Advisory Services for Growing Practices
• Tax Planning Software That Identifies Client Opportunities
• The MERNA Method for Comprehensive Tax Strategy
• Tax Strategies for Business Owners
• Client Success Stories and Case Studies

Last updated: May, 2026

This information is current as of 5/21/2026. Tax laws change frequently. Verify updates with the IRS or relevant authorities if reading this later.