'A sleeper issue': Millions could get COVID-era IRS penalties refunded — but the window to claim them is closing fast

Godwin Oluponmile

Wed, May 20, 2026 at 12:30 PM EDT 7 min read

Most Americans have already filed their taxes and moved on. But there’s a separate deadline this summer that could put real money in the pocket of tens of millions of people, and most of them don’t even know it exists.

A federal court just ruled that the IRS improperly assessed (1) penalties and interest during the COVID-19 disaster period. If you were hit with those charges, you can claim a refund, but the window closes on July 10, 2026 (2). The IRS is expected to fight the ruling, and the case could drag on. Still, the National Taxpayer Advocate — the independent voice inside the IRS that speaks for taxpayers — is urging people to act before the deadline regardless.

Must Read

• Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how

• Robert Kiyosaki says this 1 asset will surge 400% in a year and begs investors not to miss this ‘explosion’

• Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s how to fix it ASAP

“My overriding goal is to get the word out to as many taxpayers as possible and to avoid disparate results between the ‘well advised’ and the unaware,” (3)National Taxpayer Advocate Erin Collins wrote in an April 30 blog post (4).

What the court found, and why it matters

The case is titled Kwong v. United States (2), decided by the U.S. Court of Federal Claims. The ruling turned on a specific provision of the tax code governing how federal disaster declarations affect filing and payment deadlines.

When the COVID-19 national disaster was declared on January 20, 2020, the court found that the law automatically postponed all tax filing and payment deadlines for the entire duration of the disaster period — through July 10, 2023, including 60 days after the formal disaster declaration ended on May 11, 2023. That means the IRS should not have assessed failure-to-file (5) or failure-to-pay (6) penalties during that entire 3.5-year window. If it did, those assessments were improper.

“By the court’s logic, the IRS should not have assessed penalties for late filing or payment during that 3.5-year period (between Jan. 20, 2020, and July 10, 2023), nor charged interest on those amounts,” Collins wrote (4).

To understand what this means in dollars: the failure-to-file penalty is 5% of unpaid taxes per month, capped at 25%. The failure-to-pay penalty is 0.5% of the balance monthly, also capped at 25%. Interest runs on top of both penalties.

If you filed late or underpaid during the pandemic years and were hit with these charges, the total can add up quickly. If you owed $10,000 and filed 5 months late during the pandemic, you could face $2,500 in failure-to-file penalties (the 25% cap), plus $250 in failure-to-pay penalties, plus interest on top of that — totaling well over $2,750 in charges. For many taxpayers, we’re talking about a significant amount — and under Kwong v. United States (2), it could be refundable.