Three Procedure Traps in Tax Disputes: Deadlines, Credits, and Estimated Tax Penalties
Most tax disputes do not turn on a dramatic factual story. They turn on mechanics.
A deadline is calculated from a date you did not know mattered. A credit is applied in a way you did not affirmatively choose. A penalty you assumed was negotiable turns out to be mostly statutory.
A recent decision from the U.S. Court of Federal Claims addressed those mechanics directly. In Kwong v. United States, No. 1:23-cv-00267 (Fed. Cl. 2025), the court addressed the scope of statutory deadline extensions during federally declared disasters, the application of overpayments under §6402(a), and the limits of estimated penalty relief under §6654. This decision aligns with the United States Tax Court’s earlier decision in Mohamed K. Abdo et al. v. Commissioner, 162 T.C. No. 7 (2024), which reached a consistent result as to §7508A(d).
For taxpayers evaluating refund posture, the practical takeaways fall into three buckets, plus one strategic point about what to do when timing is unsettled.
1. Statutory Extensions for Refund Suits During Federally Declared Disasters
2-year limitation period for filing a refund suit under 26 U.S.C. §6532(a) automatically extended by 26 U.S.C. §7508A(d), as in effect prior to its 2021 amendment. Under that version, the extension runs for the duration of the federally declared disaster plus 60 days after the disaster ends. 26 U.S.C. §7508A(d). Applied to the COVID-19 disaster, the court concluded that taxpayers had until July 10, 2023, to file certain refund suits.
The Tax Court in Abdo reached the same conclusion and further held that the relevant period includes the entire disaster incident period plus 60 days, and that Treasury Regulation §301.7508A-1(g)(1) and (2) is invalid to the extent it limits that postponement.
Why this matters: Disaster postponement rules are easy to treat as background administrative guidance. These decisions treat §7508A(d) as a mandatory extension with real consequences, and for taxpayers evaluating refund posture, the first question may be procedural: whether the statute gives you more time than you assumed, and whether a protective filing is warranted while the government continues to test the boundaries.
2. Application of Overpayments to Prior Tax Liabilities
Under 26 U.S.C. §6402(a), the IRS may apply an overpayment to a taxpayer’s outstanding liabilities. The court held that the limitations period for filing a refund claim begins when the IRS applies the overpayment, rather than when the overpayment was originally generated. Id. The Abdo court did not address this issue.
Why this matters: Overpayment “offsets” often happen without a taxpayer making an affirmative election in real time. If the limitations period runs from the IRS’s application date, that timing can materially change how you evaluate whether a refund path is still available.
3. Limitations on Defenses to Estimated Tax Penalties
The court confirmed that penalties for underpayment of estimated tax under 26 U.S.C. §6654 are not subject to reasonable cause defenses, including reliance on professional advice. Relief is limited to the statutory exceptions set forth in §6654.
Why this matters: This is a recurring misconception for both individuals and closely held businesses: that reasonable cause, good faith, or reliance on an advisor will generally defeat penalties. For §6654 penalties, that assumption is often misplaced; the statute narrows the available relief, and the analysis typically needs to start with the exceptions Congress actually provided.
Practical Implications
Kwong and Abdo establish a consistent interpretation of §7508A(d) as a mandatory, self-executing extension covering the full disaster period plus 60 days. Where the applicability of §7508A(d) remains uncertain, filing a protective claim may preserve the taxpayer’s position. We should expect continued challenges, as the government is likely to seek to narrow the reach of these holdings through litigation, administrative guidance, and/or legislative action.
A Final Thought
These are not headline-grabbing holdings, but they are consequential. They reinforce that tax exposure is often shaped by procedural rules that sit underneath the substantive dispute: when a limitations period starts, what event counts as the operative “payment” or application, and which penalties are structurally resistant to equitable defenses.
At Kundra & Associates, our tax attorneys advise individuals and businesses nationally and internationally on IRS disputes and tax litigation posture, including protective refund claims, penalty and interest challenges, and overpayment application issues. We work with clients from our offices in Washington, D.C., Rockville, Maryland, and Mumbai, India. When the question is whether a claim is still timely, or whether a statutory remedy is still available, early legal review can preserve options that are difficult, or impossible, to recreate later.