Pandemic Penalty Payback: Federal Ruling May Mean Refunds for Cannabis and Hemp Companies

By Sahar Ayinehsazian, a partner at A.Y. Strauss, and Steven Monacelli, a partner at Withum

A recent decision from the U.S. Court of Federal Claims presents a potential refund opportunity for all taxpayers, particularly those in the cannabis and hemp industry that paid interest on federal taxes and/or certain time-based penalties during the COVID-19 period. 

In Kwong v. United States, the U.S. Court of Federal Claims issued an opinion and order that Internal Revenue Code § 7508A(d), as in effect during the COVID-19 pandemic, mandated postponement of federal tax deadlines (and suspension of related interest/penalty accruals) for obligations whose deadlines fell during the federally declared disaster period from January 20, 2020 through July 10, 2023.

Under Internal Revenue Code § 7508A(d), when a federally declared disaster occurs, certain tax deadlines are postponed for the duration of the disaster period and an additional 60 days. That shift in the legal due date matters because interest and many penalties accrue from that date. If the due date was suspended, amounts calculated from the original deadline may be open to challenge.

Notably, the decision does not automatically void prior assessments, and the IRS has not issued blanket relief. However, it does provide a legal framework for taxpayers to pursue refund or abatement claims where appropriate on or before July 10, 2026. Please be advised that this order was not a final judgment resolving all claims in the case. Rather, it granted in part and denied in part the government’s motion for summary judgment and directed the parties to file a joint status report and propose next steps, including trial dates for the remaining claims. 

As of March 9, 2026, the Court has not yet entered a final judgment in Kwong. Public reporting indicates that the parties anticipated submitting a joint motion to enter a stipulated judgment by March 13, 2026. Once a final judgment is entered, the United States will have sixty (60) days to file a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. Until judgment is entered, however, the appeal period has not yet begun to run. The Government is widely expected to appeal. Nonetheless, action to preserve your claim should be taken no later than July 10, 2026.

Why This Is Relevant to Cannabis and Hemp Operators

It is no secret that cannabis and hemp businesses operate in a uniquely complex federal tax environment. As a result, interest and penalty exposure often arises from timing mechanics as related to estimated payments, extensions, installment agreements, and income characterization, even where a business has otherwise met its compliance obligations. The Court’s interpretation of §7508A(d) is therefore particularly relevant to this industry, as it may provide a basis to revisit assessments that were calculated from deadlines later deemed suspended.

Practically speaking, operators that paid federal underpayment interest during the 2020–2023 disaster period, incurred filing or payment penalties, made installment payments that included interest, or paid penalties tied to returns with deadlines now deemed suspended, may have grounds to pursue a meaningful refund claim.

Refund claims generally must be filed within three years of the return filing date or two years from the date the tax was paid, whichever is later. Because the Court’s analysis hinges on suspended due dates during the disaster period, the applicable limitation period may extend into 2026 for certain returns. 

Consequently, a timely and careful review is very important.

Practical Next Steps

Businesses evaluating this opportunity should begin with a targeted review of their 2020–2023 federal tax history. That typically starts with obtaining IRS account transcripts and isolating interest and penalty assessments imposed between January 20, 2020, and July 10, 2023. From there, the analysis turns to whether the underlying return or payment deadlines fell within the statutory suspension window identified by the Court.

Where the deadlines align with the disaster-period suspension, taxpayers may consider filing protective refund or abatement claims to preserve their rights before the earlier of applicable limitation periods expire or July 10, 2026.

Given the cannabis and hemp industries’ federal tax posture, including the continued application of §280E and the complexity of revenue characterization and estimated payment timing, these claims should be evaluated carefully. Coordination between tax advisors and legal counsel can help ensure the analysis is technically sound and strategically positioned. This ruling presents a meaningful and time-sensitive opportunity. For cannabis and hemp businesses that incurred federal tax interest or penalties during the pandemic period, a disciplined review may uncover recoverable amounts that were never properly owed.

Refund claims are governed by statutory limitation periods, and those windows are closing. Businesses that believe they may be affected should evaluate their position promptly.

This article is from an external, unpaid contributor. It does not represent IgniteIt’s reporting and has not been edited for content or accuracy.

Photo by Jakub Żerdzicki on Unsplash