Court ruling could force IRS to refund pandemic-era late fees to millions
The case is still in court but taxpayers should file a protective refund request now
A federal court ruling could entitle tens of millions of American taxpayers to refunds of late fees and penalties they paid during the coronavirus pandemic, after a judge determined the IRS should have suspended tax-payment deadlines for nearly the entire three-year federal emergency.
The decision, issued by Judge Molly R. Silfen of the U.S. Court of Federal Claims, concluded that nobody should have been required to file or pay taxes on time during a stretch running from mid-2020 to mid-2023, the duration of the federally declared covid-19 emergency.
If the ruling survives the government’s appeals, the Internal Revenue Service could be forced to return money to anyone who was charged a late-payment fee or penalty during those years — a pool that includes more than 22 million households on 2020 and 2021 returns alone, plus untold numbers of businesses.
The Taxpayer Advocate Service, an independent watchdog inside the IRS, has urged affected filers to act quickly.
The agency’s office says claims must be submitted by July 10 to preserve a taxpayer’s legal rights — a deadline that reflects three years after the end of the pandemic disaster period plus a 60-day grace period built into federal law.
A disaster provision stretched to its limits
At the center of the case is a long-standing provision of U.S. tax law that allows people in federally declared disaster zones to delay paying their taxes. Residents of a town hit by a hurricane, wildfire or tornado generally have at least 60 days after the disaster ends to file returns and pay what they owe without penalty.
That provision was written with localized, short-duration emergencies in mind. The covid-19 pandemic was neither. The federal disaster declaration covered all 50 states, lasted roughly three years, and never confined itself to a specific geographic area. The IRS, weighing those facts, concluded the disaster-suspension rules did not apply to the pandemic and continued collecting taxes and assessing late fees throughout.
A handful of taxpayers disagreed and went to court. Silfen and other judges have now sided with them, finding that the statutory language does not carve out an exception for nationwide emergencies. Under their reading, tax debts still accrued during the pandemic, but enforcement of payment deadlines should have been paused.
The Taxpayer Advocate Service, in its analysis of the rulings, said the logic extends beyond pandemic-era tax bills. Interest and penalties on older tax debts that predate covid-19 may also have been improperly charged if they continued to grow during the pandemic window, the office said. Whether courts ultimately agree on that broader question remains to be seen.
A potentially massive refund pool
The financial stakes are unusually large for a procedural tax dispute. According to figures cited by the Taxpayer Advocate Service, more than 10 million households paid late fees tied to their 2020 returns, and more than 12 million paid such fees on 2021 returns.
Together, those two years alone account for more than $3 billion in penalties and interest paid to the federal government.
Add in 2022 and early 2023 — both still within the disaster period under Silfen’s ruling — and the total grows further. Businesses, which can face steeper penalties for late payment of payroll and corporate taxes, would also qualify if the ruling stands.
The IRS has not published comprehensive figures showing how many filers might ultimately be eligible, and agency officials have not publicly conceded that any refunds are owed. The government is appealing.
How to file a protective claim
Despite the unsettled legal landscape, the Taxpayer Advocate Service is encouraging potentially affected taxpayers not to wait for the courts to finish the appeals process.
Because tax-refund claims are subject to strict statutory deadlines, anyone who fails to file by July 10 risks losing the right to recover money even if the courts ultimately side with the plaintiffs.
The vehicle for those claims is Form 843, the standard IRS form for requesting a refund or abatement of penalties and interest. The form cannot be submitted electronically; it must be filled out on paper and mailed to the IRS.
The Taxpayer Advocate Service has offered specific drafting advice. Filers should identify which tax year or years they believe they overpaid, and they should write “Protective Refund Claim Pursuant to Kwong Case” — or wording substantially similar — across the top of the form. Taxpayers who do not know the precise dollar amount they paid in penalties and interest can still file; the office advised including as much detail as possible without holding back claims for lack of an exact figure.
A “protective” claim is a placeholder filing that preserves a taxpayer’s rights while a controlling legal question is unresolved. If the courts ultimately uphold Silfen’s ruling, the IRS would process protective claims and issue refunds. If the government wins on appeal, the claims would be denied.
Open questions for the IRS
The agency now faces both a legal and administrative challenge. If the ruling holds, the IRS will have to design a process for verifying claims, calculating refund amounts and issuing payments at potentially unprecedented scale. The agency has previously struggled with backlogs of paper filings, including amended returns and identity-theft claims, and Form 843 must be processed by hand.
It is also unclear how the IRS will handle taxpayers who had penalties and interest automatically deducted from later refunds, or those whose pandemic-era debts were absorbed into installment agreements or offers in compromise. The Taxpayer Advocate Service has published a multi-part guide explaining how filers can use IRS account transcripts to identify potential covid-19 disaster-relief refunds and how to complete Form 843 in different scenarios.
For now, the most consequential piece of advice from the watchdog is also the simplest: file by July 10. Taxpayers who believe they may have been wrongly charged a late fee or interest at any point from mid-2020 through mid-2023 can preserve their claim with a single mailed form, regardless of how the appeals ultimately resolve.
The IRS declined to comment in detail on pending litigation. The case stemming from Silfen’s ruling continues to work its way through the federal appellate system.