The Kwong decision may provide some taxpayers an opportunity to challenge certain IRS interest and penalties related to PPP loan assessments.
PPP Loan IRS Penalties: Can Form 843 Help Reduce Interest and Penalties?
This article is for informational purposes only and does not constitute legal or tax advice. Every taxpayer’s situation is unique.
If you’ve recently received an IRS notice about PPP loan IRS penalties after a Paycheck Protection Program (PPP) loan, you’re far from alone. Across the country, business owners are receiving bills years after filing their returns—often with balances that have ballooned due to interest and penalties. While the underlying tax may still be valid, a recent court case, Kwong v. United States, has introduced a potential path for some taxpayers to challenge at least part of those added costs.
The catch? The case is still being appealed. That means nothing is final yet, and the IRS isn’t proactively adjusting accounts. If you might be affected, the responsibility falls on you to act now to preserve your rights. One of the primary tools for doing that is IRS Form 843, which allows taxpayers to request an abatement or refund of certain penalties and interest.
Let’s walk through what’s happening and what it could mean for you.
Why Are PPP-Related IRS Bills Showing Up Years Later?
During the height of the COVID-19 pandemic, PPP loans were a lifeline for millions of businesses. Congress made it clear that forgiven PPP funds wouldn’t be taxed as income, and businesses could still deduct the expenses paid with those funds. On paper, that sounds straightforward, but in practice, it created a surprising amount of complexity.
Many returns were prepared under evolving guidance, and in some cases, the interaction between PPP rules and other tax provisions—especially for S corporations and partnerships—led to reporting errors. Issues involving shareholder basis, distributions, and deductions didn’t always surface immediately. Instead, they often came to light years later during IRS reviews or audits.
That’s why so many taxpayers are now receiving Notices of Deficiency, additional tax assessments, and significant interest and penalty charges long after they thought everything was settled. Even when the IRS’s tax calculation is correct, it doesn’t automatically mean every dollar of interest or penalty was properly applied. That’s where the Kwong decision enters the picture.
What Did the Kwong Case Decide?
At its core, Kwong v. United States deals with how long certain IRS deadlines should have been paused during the COVID-19 national emergency. Under Internal Revenue Code Section 7508A, the government can postpone tax deadlines during federally declared disasters—and COVID-19 qualified.
The IRS took the position that this postponement lasted only one year. The Court of Federal Claims disagreed, concluding that the relief period should have extended through the entire federally declared disaster period, effectively running through July 10, 2023 once statutory extensions were considered.
If that interpretation ultimately holds, it could mean that some taxpayers were charged interest or penalties during a time when those charges should have been suspended.
Is This Decision Final?
Not yet- and that’s critical to understand.
The federal government has appealed the ruling, so the issue is still working its way through the courts. As a result, the IRS isn’t automatically revisiting accounts or issuing refunds based on the decision. For now, taxpayers who believe they may benefit need to take proactive steps to protect their position.
That’s why many tax professionals are recommending the use of a protective Form 843 claim in situations where the facts suggest Kwong could apply.
What Kwong Does- and Doesn’t- Do
It’s important to keep expectations realistic. The Kwong decision doesn’t wipe out your entire IRS balance. It doesn’t eliminate the underlying tax, and it doesn’t automatically remove every penalty or all accrued interest.
What it may do is open the door to challenging specific interest or penalties that accrued during the COVID disaster relief period. Whether that applies to you depends on several factors, including when your return was due, when the IRS assessed additional tax, and how interest was calculated over time.
Because every case is different, a careful review is essential before assuming any portion of your balance can be reduced.
A Real Life Example
Consider a hypothetical scenario that mirrors what many taxpayers are facing.
Sarah owns a small business and filed her 2021 return on time, believing everything was accurate. At that point, she didn’t owe any additional tax. More than two years later, the IRS determined that her PPP-related deductions had been reported incorrectly and assessed roughly $270,000 in additional tax.
By the time Sarah received notice, her balance had climbed to over $410,000 due to accumulated interest and penalties.
Does Kwong erase that entire amount? No. The tax itself may still be owed. But depending on how and when the IRS calculated interest, some of those charges might fall within the COVID relief period identified in the case. That’s where a protective Form 843 claim could come into play, allowing Sarah to preserve her right to challenge those amounts while the courts continue to sort out the issue.
How Form 843 Can Help With PPP Loan IRS Penalties
Form 843, officially titled Claim for Refund and Request for Abatement, is the mechanism taxpayers use to request relief from certain penalties and interest. When the law is unsettled—as it is with Kwong—filing what’s known as a protective claim can be a smart move.
A protective claim doesn’t guarantee a refund or reduction. Instead, it keeps the door open. If the courts ultimately rule in favor of taxpayers, those who filed timely claims will be in a position to benefit. Those who didn’t may find that the statute of limitations has closed that opportunity.
Timing Matters More Than You Think
For many taxpayers, July 10, 2026 is a key date tied to the potential relief period discussed in Kwong. But statutes of limitation vary depending on individual circumstances, and waiting too long can mean losing the ability to act altogether.
That’s why it’s generally better to evaluate your situation sooner rather than later. Filing a well-prepared protective claim now can provide flexibility while the legal landscape continues to evolve.
Before You File Anything
Not every PPP-related IRS assessment warrants a Form 843 claim. Before taking action, it’s important to step back and review the full picture. That includes your IRS account transcripts, the timing of your return and assessment, how interest was calculated, and which penalties were applied.
In many cases, the transcripts tell the real story- revealing whether the charges in question actually fall within the timeframe addressed in Kwong. A thoughtful, well-supported claim is far more effective than one based on assumptions or incomplete information.
If you’re dealing with a large IRS balance tied to a PPP loan, it’s worth taking the time to understand exactly how that number was calculated. Even if the tax itself stands, there may still be opportunities to reduce the overall burden—especially while the courts continue to clarify how the law should be applied.
How to Build a Strong Form 843 Claim
If you believe the Kwong decision may apply to your situation, filing Form 843 should be approached thoughtfully rather than treated as a routine paperwork task. A strong claim clearly explains the legal basis for your request and includes supporting documentation that helps the IRS understand your position.
To put yourself in the best position, consider the following steps.
1. Review Your IRS Account Transcript
Before taking any action, start by obtaining your IRS account transcript for the relevant tax year.
This document provides a detailed timeline of your account, including:
- When the IRS assessed additional tax
- How interest was calculated
- What penalties were applied
- When those charges began accruing
Understanding these details is critical, especially when evaluating whether certain interest or penalties fall within the COVID-19 disaster relief period discussed in Kwong.
2. Identify the Interest and Penalties That May Qualify
It’s easy to assume that all penalties or interest can be challenged, but that’s not how Kwong works.
Instead, the focus is on specific amounts that may have accrued during the applicable disaster postponement period. Taking the time to isolate those amounts helps ensure your claim is both accurate and credible, which can make a meaningful difference in how it is evaluated.
3. Clearly Explain the Legal Basis
Once you’ve identified the relevant amounts, your claim should clearly explain why you believe relief is appropriate.
For taxpayers relying on Kwong, this typically involves referencing:
- Internal Revenue Code Section 7508A(d)
- Kwong v. United States
- The fact that the case is currently on appeal, if applicable
- The reason the claim is being filed as a protective claim
The goal is to present a clear, logical explanation so the IRS understands exactly what issue you are preserving and why.
4. File Before Your Deadline Expires
Timing is just as important as substance. Even while significant court cases are being appealed, statutes of limitation continue to run. Waiting for a final decision could mean missing the opportunity to preserve your claim altogether.
Filing a timely protective claim helps ensure your rights remain intact while the legal process continues to unfold.
What Happens After You File?
After submitting a protective claim, many taxpayers expect a quick approval or denial. In reality, the process is often less straightforward.
Because Kwong is still on appeal, the IRS may take several different approaches, including:
- Holding the claim while the litigation continues
- Requesting additional information
- Issuing a denial, which may require further administrative or legal action
Each situation is unique, but the key takeaway is this: filing a timely claim keeps your options open. Without it, those options may disappear once deadlines pass.
Who May Qualify for Relief From PPP Loan IRS Penalties
Not necessarily.
Some taxpayers will find that Kwong does not apply to their situation at all. Others may qualify for only a limited reduction in interest. And in many cases, there may be additional relief options available that have nothing to do with Kwong, such as:
- First Time Penalty Abatement
- Reasonable Cause Penalty Relief
- Administrative Appeals
- Collection alternatives, including payment plans or an Offer in Compromise
Because every IRS account is different, it’s important to look at the full picture rather than focusing on a single strategy.
What to Do If You’re Facing PPP Loan IRS Penalties
Receiving a large IRS bill years after filing your return can feel overwhelming, especially when interest and penalties have significantly increased the balance. While the Kwong decision does not eliminate PPP-related tax liabilities, it may offer certain taxpayers an opportunity to challenge specific interest or penalties that accrued during the COVID-19 disaster relief period.
At the same time, because the case is still being appealed, it’s important not to assume the IRS will automatically adjust your account or preserve your rights on your behalf.
If your IRS assessment involves a PPP loan deduction issue, now is the time to review your transcripts, understand how your balance was calculated, and determine whether filing a protective Form 843 claim makes sense before key deadlines expire.
At Tax Crisis Institute, we regularly help taxpayers analyze complex IRS assessments, review account transcripts, and identify every available strategy for reducing tax debt. If you’ve received an unexpected IRS bill related to a PPP loan, we can help you understand your options and build a clear path forward.
Frequently Asked Questions
Can Form 843 reduce PPP loan IRS penalties?
No. Form 843 is generally used to request the abatement or refund of certain penalties and interest. It does not eliminate the underlying tax liability if that tax is legally owed.
Does the Kwong decision apply to every PPP loan?
No. The case does not apply to every PPP loan or every taxpayer. Whether it applies depends on your specific facts, including when your return was due, how the IRS calculated interest, and when additional tax was assessed.
Is the Kwong decision final?
No. The federal government has appealed the decision, and the legal issue has not yet been fully resolved.
What is a protective claim?
A protective claim is filed to preserve your right to seek a refund or abatement while an important legal issue is still being decided. It does not guarantee relief, but it can protect your rights if the courts ultimately rule in favor of taxpayers.
Should I wait until the appeal is over before filing?
In many cases, waiting may not be advisable. Statutes of limitation continue to run while cases are on appeal, so filing a protective claim before your deadline may be necessary to preserve your rights.
What documents should I gather before filing Form 843?
Helpful documents include:
- IRS account transcripts
- IRS notices
- The tax return involved
- Any audit or examination reports
- Records showing how the IRS calculated penalties and interest
These materials help determine whether Kwong or another penalty relief strategy may apply.
What if Kwong doesn’t apply to me?
You may still have other options. Depending on your situation, you could qualify for First Time Penalty Abatement, Reasonable Cause relief, an IRS payment plan, an Offer in Compromise, or another tax resolution strategy.
Need Help Reviewing Your IRS Assessment?
Every IRS account is different, and before assuming you owe every dollar listed on an IRS notice, it’s worth having a professional review your transcripts, penalty calculations, and available relief options.
If you’ve received an IRS assessment related to a PPP loan or another complex issue, Tax Crisis Institute can help you understand your options and determine the best path forward.