The Internal Revenue Service (IRS) is facing intense scrutiny from the National Taxpayer Advocate (NTA) following a wave of premature denial letters issued to taxpayers seeking refunds tied to the landmark Kwong v. United States litigation. As the agency moves to process over 275,000 pending refund claims related to COVID-19 disaster relief, NTA Erin Collins has issued a stern warning: the IRS is risking the rights of millions by applying rigid, potentially flawed criteria to claims that are still subject to shifting judicial interpretation.
This administrative friction highlights a growing tension between the IRS’s duty to process high-volume claims and its obligation to respect the evolving legal landscape surrounding COVID-19-era statute of limitations. For hundreds of thousands of taxpayers, these letters represent not just a denial of funds, but a potential procedural trap that could permanently bar them from recovering legitimate tax refunds.
The Genesis of the Conflict: Understanding Kwong
To understand why the IRS’s current actions are causing such alarm, one must first understand the legal precedent set by Kwong v. United States (179 Fed. Cl. 382, 2025). The core of the dispute centers on the intersection of standard tax filing deadlines and the broad disaster relief measures enacted during the COVID-19 pandemic.
The Court’s Ruling
The Court of Federal Claims ruled that the two-year deadline for filing a refund lawsuit, stipulated under Section 6532(a)(1) of the Internal Revenue Code, was subject to automatic postponement under Section 7508A(d). This section governs the postponement of tax-related deadlines during federally declared disasters.
The court determined that the postponement period began on January 20, 2020, and extended through July 10, 2023. Consequently, the lawsuit filed by taxpayer Terry Kwong on February 23, 2023, which would have otherwise been considered "untimely" under pre-pandemic interpretations, was deemed perfectly valid. By establishing that the COVID-19 disaster period effectively "paused" the clock on refund litigation, the court opened the door for millions of taxpayers to claim refunds that the IRS had previously considered time-barred.
Chronology of the Dispute
The timeline of this issue reflects the rapid shift from administrative policy to judicial intervention, and finally, to current bureaucratic gridlock.
- January 20, 2020: The start of the COVID-19 disaster period as defined by the Court of Federal Claims.
- February 23, 2023: Terry Kwong files a lawsuit for a tax refund, challenging the IRS’s standard interpretation of the statute of limitations.
- July 10, 2023: The end of the disaster-related postponement period as identified by the court.
- Early 2025: The Court of Federal Claims issues its final ruling in Kwong, providing a victory for taxpayers and setting a new legal standard for filing deadlines.
- Post-Ruling 2025: Taxpayers, encouraged by tax professionals and the NTA, begin filing Form 843 (Claim for Refund and Request for Abatement) in record numbers.
- Present Day: The IRS begins issuing "no consideration" and formal denial letters, prompting the NTA’s public intervention.
Supporting Data: The Scale of the Kwong Effect
The sheer volume of claims currently flooding the IRS system underscores the sensitivity of this issue. According to NTA Erin Collins, the IRS has received more than 275,000 Forms 843 asserting Kwong-related claims. While this figure is substantial, it is merely the tip of the iceberg.
Industry experts estimate that tens of millions of taxpayers were theoretically affected by the COVID-19-related statutory interruptions. If the Kwong precedent holds, the potential fiscal impact on the U.S. Treasury—and the corresponding financial relief to households and businesses—could reach into the billions of dollars.
The IRS’s decision to issue denials at this stage suggests a defensive posture, likely intended to manage the massive influx of claims. However, the NTA argues that this strategy is administratively unsound. By failing to hold these claims in abeyance while the law settles, the IRS is essentially forcing taxpayers to navigate an adversarial system for claims that the courts may ultimately validate.
The Official Response: NTA’s Call to Action
In a Tuesday blog post, NTA Erin Collins minced no words regarding the IRS’s current strategy. She characterized the letters—which range from "no consideration" notifications to formal disallowances—as premature and potentially harmful to taxpayer rights.
A Plea for Administrative Patience
"I am particularly concerned that the IRS is sending letters to some taxpayers declining to process or disallowing their Kwong-related claims based on criteria that may not adequately account for the legal issues still being litigated," Collins wrote.
Collins has formally requested that the IRS:
- Identify affected taxpayers: The agency must audit which individuals received these letters to understand the scale of the error.
- Review determinations: Every denial issued during this period of legal flux should be subject to a secondary review to ensure it aligns with the Kwong decision.
- Implement a "Hold" policy: Drawing from the Internal Revenue Manual (IRM), which generally supports the suspension of action on protective claims during ongoing litigation, Collins is urging the IRS to pause the processing of these claims until the legal questions are fully resolved.
Implications for the Taxpayer
For the average taxpayer, receiving a letter from the IRS is often a source of significant anxiety. The NTA’s warning is clear: do not ignore the letter, but do not assume it is the final word.
The Danger of the "Two-Year Clock"
A critical point of confusion for many taxpayers is the legal weight of a "Notice of Claim Disallowance." Under federal law, receiving such a notice officially triggers a two-year countdown for the taxpayer to file a refund lawsuit in federal court. If a taxpayer receives this letter and fails to act, they may permanently lose their right to sue for that refund, regardless of whether the Kwong litigation eventually confirms they were entitled to it.
Conversely, if taxpayers interpret these letters as a signal that they must sue immediately to protect their rights, the federal courts could face an unprecedented and unmanageable backlog of litigation.
"Taxpayers who took timely steps to preserve their rights should not be placed at risk of losing those rights because the IRS prematurely denied or declined to process their claims while the controlling legal questions remain unresolved," Collins noted.
Moving Forward: What Taxpayers Should Do
The current situation is one of administrative limbo. For taxpayers and their advisors, the following steps are recommended:
- Keep Records: Ensure that all correspondence with the IRS is documented. If you receive a denial letter, keep the original envelope and any attachments to verify the date of receipt.
- Consult Counsel: Because the legal interpretation of the Kwong case is still evolving, taxpayers should consult with a tax attorney or CPA to determine whether to file an administrative appeal or to prepare for potential litigation.
- Monitor IRS Guidance: The NTA has specifically requested that the IRS update its screening criteria. Taxpayers should keep an eye on official IRS announcements, as the agency may issue a blanket stay or new instructions for Kwong-related claims in the coming months.
- Avoid Premature Litigation: Unless the two-year deadline for filing a lawsuit is imminent, taxpayers should evaluate whether to wait for the IRS to act on the NTA’s request for a pause. Filing a lawsuit is a costly and time-consuming process that should be treated as a last resort.
The Path Toward Resolution
The resolution of this issue will likely depend on whether the IRS adopts a more collaborative stance with the Office of the National Taxpayer Advocate. If the IRS continues to push forward with denials, it risks not only damaging its reputation with the public but also creating a mountain of litigation that will ultimately be decided against it in court.
By holding these claims, the IRS could protect taxpayer rights, significantly reduce the administrative burden of processing appeals, and minimize unnecessary, expensive litigation. For now, however, the burden remains on the taxpayer to remain vigilant, stay informed, and exercise their rights with caution while the wheels of justice—and the bureaucratic machinery of the IRS—continue to turn.
