IRS owes some taxpayers refunds for pandemic-era penalty tax relief

The IRS owes some taxpayers refunds after they were mistakenly left out of a pandemic-era IRS relief program, according to a new watchdog audit.

More than 2,100 taxpayers have had their tax accounts corrected after auditors found they were collectively eligible for an estimated $463,000, according to a recently released report from the Treasury Inspector General for Tax Administration.

TIGTA’s audit found that 2,138 taxpayers, representing 2,248 tax accounts, should have been eligible for relief from so-called failure-to-pay penalties related to unpaid taxes for 2020 and 2021. The average penalty refund owed per account was $206, the watchdog said, although the exact amount depended on the specifics of the taxpayer’s situation.

The IRS has credited the overlooked taxpayers’ accounts by the amount owed to them, according to the report. Those adjustments generally either reduce any balance owed or may be refunded via a check or direct deposit if there’s no balance.

Nearly 5 million individuals, businesses, trusts, estates, and tax-exempt organizations already received about $1 billion in penalty relief under the temporary failure-to-pay waiver by the IRS. The relief period, announced by the IRS in December 2023, began on the date that the agency issued an initial balance-due notice to a taxpayer, or Feb. 5, 2022, whichever was later, and ended on March 31, 2024.

Generally, the penalty for paying taxes late is 0.5% of the unpaid taxes for each month or partial month, and can reach a maximum of 25%. The IRS also charges interest on amounts due, and the rate, which accrues daily, is equal to the federal funds rate plus three percentage points.

There’s also a failure-to-file penalty if you don’t file your tax return by the due date. That penalty is 5% of the unpaid tax amount for each month or partial month that the return is late, and accrues up to a maximum of 25%.

“As you can see, this adds up quickly,” said Josh Youngblood, an enrolled agent and founder of The Youngblood Group in Dallas.

“Always file even if you cannot pay. The IRS will work with you,” Youngblood said. “There are a variety of resolutions available.”

As the 2026 tax-filing season gets underway, there may be some reasons to get a jumpstart on preparing your tax return to avoid potential penalties and interest charges.

For starters, be aware that if you mail your returns, it’s worth getting to the post office plenty of time ahead of the tax-filing deadline, which is April 15. 

Due to operational changes at the U.S. Postal Service, the agency expects an increase in delays between when you mail something and when it is postmarked. A postmark shows the date your mail was processed, and it no longer is always applied the same day you mail an item.

So, while the IRS considers any tax return postmarked on or before April 15 as being filed on time, you can’t assume that dropping your return at the post office or putting it in a mailbox means it will get postmarked the day you drop it off. You can either mail it well in advance or ask the clerk to manually cancel it.

Given additional challenges such as the 27% workforce reduction at the IRS and tax law changes from President Trump’s so-called big beautiful bill, “the success of the filing season will be defined by how well the IRS is able to assist the millions of taxpayers who experience problems,” National Taxpayer Advocate Erin Collins said in her annual report to Congress.

The IRS expects about 164 million individual tax returns to be filed by the April 15 deadline.