Federal Court Rulings on IRS COVID Penalties: What Taxpayers Need to Know

reading time: 14 minute(s)

During the COVID-19 pandemic, millions of taxpayers across the United States were assessed late-filing and late-payment penalties by the IRS, even as the federal government declared a nationwide disaster that legally suspended those very deadlines. For years, most taxpayers assumed those penalties were valid and paid them without question.

Two independent federal court rulings have since changed that assumption entirely. If you were assessed IRS penalties between 2020 and 2023, you may be eligible to recover what you paid, but time is running out.

What happened during COVID

When the COVID-19 pandemic began, the IRS declared a nationwide disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This declaration automatically suspended certain tax filing and payment deadlines for affected taxpayers.

Despite this, the IRS’s automated systems continued operating as normal. 

Late-filing and late-payment penalties were assessed on millions of returns during the disaster declaration period. Taxpayers received penalty notices, paid the charges, and moved on, unaware that those assessments may not have had a legal basis.

The court rulings that changed everything

Two independent federal courts have since examined whether the IRS had the legal authority to assess those penalties during an active disaster declaration. Both reached the same conclusion — it did not.

• Abdo v. Commissioner (2024: In this case, the U.S. Tax Court ruled that IRS penalties assessed during the COVID disaster declaration were invalid. The court found that the IRS lacked the legal authority to assess late-filing and late-payment penalties during the period covered by the disaster declaration.
  
• Kwong v. United States (2025): A separate federal court independently reached the same conclusion in this case, confirming that the IRS exceeded its authority in assessing penalties during the active disaster declaration period.

Since two courts independently reached the same ruling, it significantly strengthens the legal foundation for taxpayer refund claims.

What these rulings mean for taxpayers

The rulings established that penalties assessed during the COVID disaster declaration period may not have been legally valid. This has two important implications:

• Taxpayers who paid those penalties may be eligible for a refund, including the penalty amount and any accrued interest.
  
• A formal claim must be filed. The IRS does not issue these refunds automatically, even where the penalties have been ruled invalid.

The IRS has already refunded $1.2 billion to some affected taxpayers. However, millions more were assessed penalties under the same circumstances and have not received anything, either because they were unaware of the rulings or because they have not yet filed a claim.

Who may be eligible

Eligibility is broader than most filers expect, applying to more than just small businesses and self-employed individuals. 

You may be eligible if:

• You were assessed a late-filing or late-payment penalty on any federal tax return between January 20, 2020 and July 10, 2023
  
• You paid the penalty in full or in part
  
• You have not already received a full refund or abatement of those penalties

Eligible filer types include:

• Individual taxpayers: W-2 employees, freelancers, and self-employed individuals.
  
• Small businesses: S-Corps, partnerships, LLCs, and sole proprietors.
  
• Large corporations: Of any size. Refund amounts can be significantly larger than for individuals.
  
• Estates and trusts: Those that filed or paid late during the pandemic period.
  
• International information return filers: Filers with penalties on Form 5471, 5472, and similar forms may also qualify, even when no tax was owed.

What can be refunded

If your penalties qualify, your potential refund may include more than just the original penalty amount.

• The penalty itself: The full amount assessed for late filing or late payment.
  
• Interest on the penalty: Interest accrues from the date the penalty was originally assessed. For 2020 penalties, the estimated interest rate is approximately 19% when compounded over the period.

This means your actual refund could be higher than what you originally paid in penalties, depending on when the penalties were assessed and how long ago they were charged.

The deadline you cannot miss IRS rules allow three years from the original filing date to claim a refund. For COVID-era penalties, that window closes on July 10, 2026.

TaxBandits × PenaltyBack — check your eligibility before July 10, 2026

TaxBandits has partnered with PenaltyBack, an IRS-authorized claim service by TaxNow, led by Kenneth Dettman, CPA, former Tax Partner at Alvarez & Marsal, to help taxpayers check their eligibility and submit their refund claims before the deadline.

The process is straightforward:

• Check your eligibility at no cost
• Authorize PenaltyBack to retrieve your IRS transcripts
• Review your estimated refund amount
• Let PenaltyBack prepare and file your claim before July 10, 2026

There is no upfront cost. PenaltyBack’s fee applies only upon successful refund recovery.