A Federal Court Says the IRS Charged COVID-Era Penalties It Should Not Have: What to Do If You Paid Between 2020 and 2023

In November 2025, a federal court ruled that the IRS charged failure-to-file penalties, failure-to-pay penalties, and underpayment interest that the law never authorized during the COVID-19 disaster period. A protective-claim deadline tied to that ruling passed on July 10, 2026. If that deadline is behind you, this article explains what happened, whether any relief paths remain open, and why the issue may still matter if you have unpaid penalties sitting on your account right now.

What the Court Actually Decided

The case is Kwong v. United States, 179 Fed. Cl. 382. In late 2025, Judge Molly Silfen of the U.S. Court of Federal Claims ruled in favor of the taxpayer, holding that COVID-19 tax deadlines were automatically extended to July 10, 2023, under a 2019 statute.

That may sound technical, so here is what it means in plain language. The court held that a federal law, IRC Section 7508A(d), required a mandatory, automatic extension of federal tax deadlines for the entire duration of the COVID-19 disaster period, from January 20, 2020, through July 10, 2023. That is more than three years of suspended deadlines, far longer than the limited relief windows the IRS had announced administratively during the pandemic.

The IRS took a much narrower view. The agency accrued interest and penalties as if the statute did not exist, taking the position that its administrative notices, a post hoc Treasury regulation issued in June 2021, and a one-year cap in Section 7508A(a) defined the outer limits of available relief.

The court disagreed. The opinion relied heavily on the plain text of the statute, which says the deadline relief “shall be” granted to affected taxpayers in a federally declared disaster, mandatory language, not discretionary. The court declined to defer to the IRS’s contrary reading.

The practical stakes are broad. Because COVID-19 was a nationwide disaster declaration, the geographic qualification is met for virtually every U.S. taxpayer. According to IRS Publication 55B, the IRS assessed tens of millions of failure-to-file and failure-to-pay penalties on COVID-era returns. The National Taxpayer Advocate, in a blog post dated April 30, 2026, estimated that “tens of millions of taxpayers may be eligible for significant tax refunds” if the Kwong reading holds.

Which Penalties and Tax Years Were Involved

The ruling affects failure-to-file and failure-to-pay penalties, as well as estimated tax penalties and underpayment interest accrued during that period. In concrete terms, if a taxpayer had a return due on April 15, 2021, but did not file the return and pay the taxes due until May 2022, they would have been assessed late-filing and late-payment penalties, even though under the court’s reading the deadline had not actually passed yet.

The tax years most directly in play are 2019 through 2022, because those are the years where filing deadlines and payment due dates fell inside the January 20, 2020 to July 10, 2023 window the court identified.

The July 10, 2026 Deadline: What It Was and Why It Has Passed

Under the court’s reasoning in Kwong, the three-year statute of limitations on refund claims, measured from the extended deadline of July 10, 2023, closes on July 10, 2026. That date is now behind us.

The deadline applied to taxpayers who had already paid those penalties and wanted to claim a refund. Relief was not automatic. Many taxpayers needed to file a refund claim, amended return, original return, abatement request, or protective claim to preserve their rights. The form was IRS Form 843, Claim for Refund and Request for Abatement.

There is an important nuance worth understanding, even now. The IRS has appealed the decision, so the law is still unsettled. The Federal Circuit could affirm Kwong, reverse it, or remand for further proceedings. There is no public timeline for the decision. The IRS is not currently issuing refunds under this ruling.

If you missed the July 10, 2026 deadline and had already paid the penalties, the refund path tied to Kwong is, for most taxpayers, likely closed. That is a hard outcome, and the National Taxpayer Advocate said as much: “missing the deadline may permanently prevent taxpayers from receiving a refund to which they may ultimately be entitled,” and in the Advocate’s view, “this is not a fair result for taxpayers.”

If You Have Not Paid Yet, the Abatement Door May Still Be Open

Here is where the news gets more relevant for people still dealing with active IRS balances. The July 10, 2026 deadline was specifically tied to refund claims for penalties already paid. It does not automatically close the door on abatement of penalties you have not yet paid.

Taxpayers who have been assessed penalties or interest but have not paid generally need to request abatement. Because abatements of unpaid amounts are not refunds, they are not governed by the same refund claim deadline, but taxpayers should still act promptly.

Beyond the Kwong argument itself, two separate penalty-relief programs remain available depending on your situation.

First-Time Abatement and the New Automatic Exemption from Penalty Program

The IRS is replacing First Time Abatement with the Automatic Exemption from Penalty program, or AEP. Eligible taxpayers will no longer need to contact the IRS to request first-time penalty relief. AEP provides relief automatically and will replace First Time Abate for eligible returns with original due dates on or after January 1, 2027. For earlier tax years, the original First Time Abatement process is still available. To qualify, you must have a clean compliance history for the three tax years before the year the penalty was assessed, meaning no penalties, filed returns on time, and paid or arranged to pay any taxes owed.

Reasonable Cause Abatement

Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause. The IRS will review those requests and notify taxpayers of the outcome. Acceptable reasons include serious illness, natural disasters, or other events beyond your control that prevented timely tax filing or payment. If the COVID-19 pandemic itself disrupted your ability to file or pay on time, that history may be relevant to a reasonable cause argument depending on your individual circumstances.

What This All Means If You Are Behind on Taxes Right Now

If you are currently carrying a balance with the IRS that includes penalties assessed between 2020 and 2023, a few things are worth keeping in mind.

First, the Kwong appeal is still working through the courts. The broader application of the case, including its impact on refund claims, penalty abatements, underpayment interest, and other COVID-era penalty and interest issues, may ultimately depend on taxpayer-specific facts, future IRS guidance, and appellate outcomes. How the Federal Circuit rules could reopen or further close options that seem settled today.

Second, recovery amounts vary widely depending on the size of the original tax liability, the number of affected tax years, and the types of penalties and interest assessed. Taxpayers with larger liabilities and substantial penalty or interest assessments may have larger amounts at stake. For individuals, the dollars at issue may range from modest amounts to more substantial sums depending on the facts.

Third, the Kwong issue is just one piece of the picture. Penalty abatement, installment agreements, and other resolution tools remain available independent of any court ruling, and the right approach depends entirely on the details of your account.

What to Do Next

The most important thing you can do right now is get a clear picture of what the IRS actually says you owe and why. Your IRS account transcript will show every penalty and interest charge by type, tax year, and date assessed. That is the starting point for any abatement argument, whether it rests on Kwong, first-time abatement, reasonable cause, or some combination.

If you are behind on filing, filing late is still better than not filing at all. The failure-to-file penalty is significantly steeper than the failure-to-pay penalty, and getting into compliance opens up more relief options.

The Kwong case illustrates something that taxpayers in debt to the IRS often do not realize: the penalties on your account are not always final. Courts challenge them, the IRS abates them by the millions every year, and experienced tax professionals know which arguments apply to which situations. The question is whether anyone has looked at your account with that lens.

At Clear Start Tax, we review your IRS account, identify every penalty you may be eligible to challenge or abate, and handle the paperwork and IRS communication on your behalf. If COVID-era penalties are part of what you owe, we can assess whether any relief path, including abatement of unpaid amounts, may be available given your specific circumstances. Reach out today to schedule a free consultation.