Tax season ended months ago. Yet a federal court decision has created a narrow opening for tens of millions of Americans to recover penalties and interest the IRS charged during the COVID-19 emergency. The clock is ticking. Claims must reach the agency before July 10, 2026.
Erin Collins, the National Taxpayer Advocate, called it a “major refund opportunity.” Yahoo Finance reported her assessment in June 2026. The stakes are real. Failure-to-file penalties normally run 5% a month on unpaid taxes. Failure-to-pay penalties add another 0.5% monthly. Combined, they top out at 25%. Many taxpayers absorbed these charges between Jan. 20, 2020, and July 10, 2023.
But several court rulings, led by Kwong v. United States, determined the IRS should not have imposed them. The official federal disaster declaration postponed deadlines. Interest on those penalties should not have accrued either. Yahoo Finance laid out the mechanics. The relief is not automatic. Taxpayers must file protective claims. And the government retains the right to appeal the decisions.
Court Rulings Challenge IRS Penalty Assessments
The period in question stretches across more than three years. It encompasses the full COVID disaster window plus 60 days. During that time, many individuals and businesses faced disrupted operations, delayed mail, and confused guidance. The IRS nevertheless assessed late fees on millions of returns.
Now those assessments face fresh scrutiny. The rulings suggest disaster relief provisions should have suspended penalty clocks. Refunds or abatements could follow for anyone charged during the protected dates. Yet the July 10, 2026, cutoff leaves little room for delay. Miss it and the chance disappears.
Recent IRS data shows the agency still holds thousands of related cases. As of late May 2026, roughly 20,600 Employee Retention Credit claims remained in process, according to the agency’s own update. IRS.gov published the figures. While that program differs from pure penalty relief, the backlog illustrates persistent pandemic-era tax complications.
Businesses that claimed the ERC have encountered even stricter rules. A sweeping federal tax bill known as the One Big Beautiful Bill Act, or OBBBA, imposed new limits. The IRS now refuses to issue refunds for certain 2021 claims filed after Jan. 31, 2024. IRS.gov released clarifying FAQs in October 2025. Taxpayers who received early refunds before July 4, 2025, can keep them in most cases. But other compliance actions may still produce bills or adjustments.
So the penalty refund window stands apart. It offers individuals and smaller entities a distinct shot at recovery. Protective claims preserve rights while courts sort final details. Tax professionals urge speed. The National Taxpayer Advocate’s office has pressed the IRS to resolve these matters faster and communicate clearly. Its May 2025 blog post stressed the need to finish processing all remaining ERC claims by the end of 2025 and protect taxpayer rights. TaxpayerAdvocate.IRS.gov carried the message.
Processing times vary wildly. Low-risk ERC claims moved quicker in late 2025. Higher-risk ones linger under audit. The IRS reported handling hundreds of thousands of claims worth billions. Yet a backlog exceeding one million persisted into 2025, per earlier estimates cited by Bloomberg Tax and others. Newer data from June 2026 shows progress on some PEO-related cases, with only 490 periods outstanding across 20 EINs, according to the National Association of Professional Employer Organizations.
Confusion abounds. Promoters once flooded the market with aggressive ERC pitches. The IRS paused new claims in 2023 to combat fraud. It warned repeatedly against scams. Some taxpayers who filed late now face disallowance. Others received payments only to learn they must report the credit as income in the year received, following a March 2025 policy shift. Ballard Spahr analyzed the reversal in April 2025. The change gave many businesses flexibility on amended returns. They could include overstated wage expenses as gross income in the payment year rather than filing multiple prior-year corrections.
But for straight penalty relief, the path looks simpler. File the protective claim. Document eligibility for the 2020-2023 window. Wait for guidance or resolution. And hope the courts uphold the Kwong logic.
A June 2026 Forbes article described one refund suit that survived dismissal. An Ohio company, First Source, can pursue its 2021 ERC claim as a refund action, though related Administrative Procedure Act challenges were tossed. Forbes reported the mixed ruling on June 12, 2026. Such cases signal continued litigation ahead.
Taxpayer advocates worry about communication gaps. Many eligible individuals never read court notices or IRS alerts. Social media chatter in June 2026 showed persistent questions about refunds, penalties, and self-employment credits that often mask scams. One advisory firm reminded clients to act before the July deadline on COVID penalty refunds. Another warned against promoter-driven “self-employment tax credit” schemes that could trigger audits.
The broader picture reveals an IRS still digging out from pandemic overload. Funding fluctuations, staff turnover, and shifting priorities under new leadership have slowed resolution. The National Taxpayer Advocate’s annual reports repeatedly flagged ERC backlogs and identity theft delays. Processing 500,000 additional claims in 2025 was once the goal. Whether that target holds remains unclear.
Eligible taxpayers face a choice. Act now on the penalty opportunity and secure potential refunds. Or risk permanent loss once the window shuts. The difference could total thousands of dollars per return. For some, it means the difference between financial strain and relief.
Courts may refine the exact parameters in coming months. Appeals could narrow or expand relief. In the meantime, the July 10, 2026, date functions as a hard stop for protective filings. Taxpayers who paid penalties during the covered period should review old notices, consult records, and consider professional help to prepare claims.
The IRS has not yet issued blanket guidance on the exact claim process tied to these rulings. That leaves practitioners parsing court opinions and NTA statements. Erin Collins’ office continues to push for faster action and clearer instructions. Its blog and reports offer the most direct advocacy on record.
Recent X posts echo the urgency. Accountants reminded followers that COVID penalty refunds require action before the summer 2026 cutoff. Others highlighted ongoing ERC processing updates, with the agency closing in on remaining high-volume cases.
This moment captures a larger truth about tax administration after crisis. Emergency relief creates complex repayment and enforcement challenges that linger for years. The penalty refund opening represents one attempt to correct overreach. Whether it delivers meaningful recovery for millions depends on how many file in time and how the IRS responds.
One fact stands clear. The deadline will not move. Those who qualify have weeks, not months, to act. Short window. High potential. The choice belongs to the taxpayer.
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