COVID-era IRS penalties may be refundable: what crypto investors need to know before July 10, 2026

Two court rulings could mean refunds for tens of millions of taxpayers

Tens of millions of US taxpayers may be entitled to refunds of penalties and interest tied to tax obligations during the COVID-19 federal disaster period. Two recent court rulings, taken together, support the position that the IRS may have improperly charged late-filing penalties, late-payment penalties, estimated tax penalties, and interest tied to obligations in the 3.5-year window from January 20, 2020, through July 10, 2023.

In April 2024, the US Tax Court ruled in Abdo v. Commissioner, 162 T.C. 148, that IRC §7508A(d) creates a mandatory, self-executing extension of federal tax deadlines during a federally declared disaster. The court invalidated a Treasury regulation that had tried to narrow the provision.

In November 2025, the US Court of Federal Claims followed Abdo's reasoning in Kwong v. United States, 179 Fed. Cl. 382. The court ruled that the §7508A(d) postponement applied to the deadline for filing a refund lawsuit in federal court. The National Taxpayer Advocate and tax practitioners have applied the same statutory reasoning to argue that penalty and interest assessments tied to obligations during the disaster window may also be refundable or abatable.

The Department of Justice has filed a notice of appeal in Kwong, and the IRS has issued an Action on Decision in Abdo taking a narrow view of §7508A(d). A final resolution could take years. Acting now helps preserve refund rights while the appeal moves forward.

Why crypto investors may be affected

The 2020-2022 crypto cycle produced exactly the conditions these rulings address.

The 2021 bull market created large gains and surprise tax bills. The 2022 market collapse, including the Terra, Celsius, and FTX failures from May through November 2022, created illiquidity for taxpayers managing 2021 returns on extension and 2022 estimated tax payments. DeFi yield, NFT activity, and cross-chain bridging added complexity that drove extensions and late filings. Estimated tax payments were commonly underpaid during high-volatility years.

If you paid any of the following tied to tax obligations whose deadlines fell in the COVID window, you may be eligible for a refund or abatement:

• Failure-to-file penalty
• Failure-to-pay penalty
• Estimated tax underpayment penalty
• Interest tied to filing or payment obligations that were arguably postponed during the disaster period
• International information return late-filing penalties under IRS rules (such as Form 5471 or Form 8938), if they apply to you

Final eligibility depends on how the appeal resolves and on your specific facts.

How to check if you have refundable penalties

You can find out by reviewing your IRS account transcript:

1. Sign in to your IRS Online Account. Create one if you don't have one yet.
2. Pull your account transcripts for tax years 2019, 2020, 2021, and 2022.
3. Look for line items showing assessed penalties (failure-to-file, failure-to-pay, estimated tax penalty) and interest charges tied to tax obligations with due dates between January 20, 2020, and July 10, 2023. The penalty or interest may have been assessed later, so focus on the underlying obligation period, not just the assessment date.
4. Note the assessment dates, the type of penalty or interest, the underlying tax year, and the amounts. You'll need this if you decide to file a claim.

Filing a refund claim, an abatement request, or a protective claim

You have three options, depending on whether you've already paid the penalty and whether the legal question affects your claim:

Refund claim (for amounts you've already paid). File Form 843, Claim for Refund and Request for Abatement. State the legal basis (the Kwong issue), the tax year, the type of penalty or interest, and the amount.

Abatement request (for amounts the IRS has assessed but you haven't paid). Use the same Form 843. State that you're requesting abatement rather than a refund.

Protective claim (for amounts where the law is still unsettled). A protective claim preserves your right to a refund or abatement while the Kwong appeal moves forward. Per IRS procedures, a valid protective claim must:

• Be in writing and signed
• Include your name, address, identification number (SSN, ITIN, or EIN), and contact information
• Identify and describe the legal issue affecting the claim (the Kwong issue)
• Be clear enough to alert the IRS to the basis of the claim
• Identify the specific tax year or years involved

To file a protective claim, use Form 843, write "Protective Refund Claim Pursuant to Kwong Case" across the top (or "Protective Abatement Claim Pursuant to Kwong Case" if you're seeking abatement of unpaid amounts), and fill in as much detail as you have.

Practical considerations:

• Form 843 is paper-only. It can't be filed electronically.
• File a separate Form 843 for each tax period, type of tax, or fee.
• Attach supporting documents you have available: copies of IRS notices, transcript entries showing the penalty or interest assessment, and payment records. The Form 843 instructions ask you to explain the claim, show the computation, and attach supporting evidence.
• Check the Form 843 instructions for the correct mailing address for your claim. The address depends on the type of tax or penalty involved.
• Send by certified mail with return receipt. The IRS doesn't send confirmation that it has received the claim, so the certified mail receipt is your best proof of timely filing.
• Keep copies of everything you send.
• The IRS will typically hold protective claims in suspense until the courts resolve the underlying legal question.
• If the IRS doesn't allow or disallow your refund claim within 6 months of filing, you generally have the right to sue in federal court under IRC §6532(a). Once the IRS formally disallows the claim, you have 2 years from the date the IRS mails the disallowance notice to file suit.

The deadline: most claims by July 10, 2026

Under IRC §6511(a), a refund claim must generally be filed within the later of:

• 3 years from the date the return was filed (including extensions), or
• 2 years from the date the tax was paid.

Under the Kwong reading of §7508A(d), returns and payments due during the COVID extension period were treated as timely if filed or paid by July 10, 2023. The 3-year deadline measured from that date is Friday, July 10, 2026.

For taxpayers who paid the penalty or interest later, the 2-years-from-payment rule may give a later deadline. For example, someone who paid a penalty on July 1, 2025 has until July 1, 2027.

Taxpayers with ongoing IRS examinations, Appeals proceedings, or litigation may have other procedural rules that affect their deadline. If that applies to you, work with a tax professional rather than assuming the deadline is later.

Important caveats

A few things to keep in mind:

• The position isn't settled. The Department of Justice has filed a notice of appeal in Kwong, and the IRS has issued an Action on Decision in Abdo taking a narrow view of §7508A(d). The appeal could take years.
• The National Taxpayer Advocate is an independent voice within the IRS. Its blog posts and commentary on this issue don't necessarily reflect the position of the IRS or the Treasury.
• Pre-disaster delinquencies are likely excluded. The Kwong opinion didn't directly address whether the postponement applies to penalties and interest that began accruing before January 20, 2020. Under the IRS's existing regulatory position, these aren't refundable.
• Older payments may also be subject to additional limits on the amount you can actually recover under IRC §6511(b)(2), which limits refunds based on when payments were made. A tax professional can confirm what's recoverable in your specific case.
• A protective claim isn't a guarantee of a refund. It preserves your right to claim if the law ultimately supports it.
• This article focuses on individual income tax for tax years 2019 through 2022. Other tax years and obligations with deadlines in the COVID window may also qualify. A tax professional can help you assess your full exposure.
• State-level penalty refund options may exist separately, but state rules vary widely and aren't part of the Kwong framework. If you also paid state-level penalties, check the rules in each state where you filed.

How CoinTracker can help

CoinTracker doesn't file Form 843 or claim refunds. The claim itself is procedural and lives outside our product.

You can sign in to your CoinTracker account to review your historical crypto tax filings, capital gains, and income reports. That information may help you reconstruct what you reported for each affected tax year. If you need help interpreting your IRS transcript or completing Form 843, the right next step is a tax professional.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.

FAQ

Do I have to pay the penalty first to file a claim?

No. If you've already paid, you can file a refund claim. If the IRS assessed the penalty but you haven't paid, you can file a request for abatement. Either type can be a protective claim while the law is unsettled.

Can I file the claim myself?

Yes. Form 843 is a taxpayer-filed form.

Can I combine multiple tax years on one Form 843?

No. File a separate Form 843 for each tax period, type of tax, or fee.

What happens after I file?

Protective claims are typically held in suspense until the courts resolve the underlying legal question. Formal refund and abatement claims may be processed, allowed, disallowed, or held depending on the IRS's view of your facts. Respond promptly if the IRS asks for more information.

What if my deadline is later than July 10, 2026?

Some taxpayers have a later deadline under the 2-years-from-payment rule. If that applies, you have more time, but acting now is still the safer choice.

Sources and further reading

• National Taxpayer Advocate Blog Part I (April 30, 2026): Tens of Millions of Taxpayers May Be Eligible for Significant Tax Refunds
• National Taxpayer Advocate Blog Part II (May 5, 2026, updated May 14): How to Use IRS Tax Account Transcripts to Identify Potential COVID-19 Disaster Relief Refunds
• National Taxpayer Advocate Blog Part III (May 7, 2026): Protect Your Potential COVID-19 Disaster Relief Refunds By Filing Formal or Protective Claims
• IRS Form 843 and instructions: About Form 843
• IRS Online Account: Your Online Account