Failure-to-Pay Penalty COVID Refund

What the failure-to-pay penalty is

IRC § 6651(a)(2) imposes an addition to tax when a taxpayer fails to pay the tax shown on a return by the original due date. The penalty is 0.5% of the unpaid amount per month (or fraction of a month), capped at 25%. The rate increases to 1% per month after the IRS issues a notice of intent to levy under § 6331(d) and the period for response has expired. The rate decreases to 0.25% per month for any month an installment agreement is in effect.

An extension of time to file does not extend the time to pay. Many taxpayers file Form 4868 to extend their 1040 to October but still incur § 6651(a)(2) accrual on any unpaid balance from the original April due date. On the transcript, the assessment posts as TC 276 (computer-generated) or TC 270 (manually assessed). The 23C date is the legal assessment date.

The penalty is conceptually distinct from underpayment interest under § 6601, which accrues at the federal short-term rate plus 3 percentage points and posts as TC 196. Both can appear on the same transcript and both may be addressable on a single Form 843.

How the failure-to-pay penalty is calculated

Take the unpaid tax balance as of the original due date. Multiply by 0.5% for each whole or partial month the balance remained unpaid. Apply the 1% rate from the date a notice of intent to levy expired without response. Apply the 0.25% rate during any installment-agreement period. Cap the cumulative penalty at 25% of the original unpaid amount.

Worked numbers: a small business that filed timely on April 15, 2021 but could not pay $30,000 of its 2020 tax accrued failure-to-pay over 18 months at 0.5% per month, producing roughly $2,700 in penalty before any rate change. If a levy notice expired during the period, the rate doubled to 1% for the months that followed and the assessment increases accordingly.

Why Kwong v. United States may unlock a refund

IRC § 7508A(d) provides a mandatory extension period for filing and payment deadlines for taxpayers in a federally declared disaster area. The November 2025 Court of Federal Claims decision in Kwong v. United States, 179 Fed. Cl. 382, read § 7508A(d) to require automatic suspension of those deadlines across the COVID-19 disaster period — broadly January 20, 2020 through July 10, 2023. Failure-to-pay assessments that arose during that window may have been imposed without statutory authority under the Kwong reading.

The argument is direct because § 6651(a)(2) attaches to the payment deadline that § 7508A(d) suspends. The Kwong ruling is currently being appealed; eligibility is not guaranteed. A protective Form 843 preserves the claim regardless of how the appeal resolves.

Finding the failure-to-pay penalty on your IRS account transcript

Pull your IRS account transcript (see our transcript guide). For § 6651(a)(2), look for:

• TC 276 — computer-generated failure-to-pay assessment, the most common posting.
• TC 270 — manually assessed failure-to-pay penalty.
• TC 271 / TC 277 — abatements of TC 270 / TC 276.
• TC 196 — underpayment interest accruing alongside the penalty under § 6601. Often addressable on the same Form 843.
• The 23C date — the legal assessment date. Inside the COVID-19 disaster window means the assessment is a Kwong candidate.
• TC 670 — payment of the assessed amount; relevant to the 2-year-from-payment refund window.

Worked example: a small business with stacked TC 276 assessments

Consider a small business that filed its 2020 Form 1040 timely on April 15, 2021 with a $30,000 balance due and could not pay. The IRS account transcript shows a TC 276 of approximately $1,800 with a 23C date of November 8, 2021 (covering the first 12 months at 0.5%), a second TC 276 of approximately $900 with a 23C date of October 31, 2022 (covering the next six months), and a TC 196 of approximately $2,400 in underpayment interest across the same period. The taxpayer paid the full balance in May 2023.

Each TC 276 entry's 23C date sits inside the COVID-19 disaster window. The 2-year-from-payment window measured from May 2023 closes around May 2025 and may extend further under the § 7508A(d) suspension theory in Kwong. A protective Form 843 referencing IRC § 7508A(d), Kwong v. United States, 179 Fed. Cl. 382 (Nov. 2025), and each TC 276 and TC 196 entry preserves a refund claim of approximately $5,100.

Common scenarios where failure-to-pay may be refundable

Filed timely but could not pay

The most common pattern: a Form 4868 extension, a timely-filed return, and an unpaid balance carrying § 6651(a)(2) accrual. Each segment of the accrual posts as its own TC 276 with its own 23C date. Each is a separate Kwong candidate when the date falls inside the disaster window.

Penalty rate jumped to 1% after a levy notice

If the IRS issued a notice of intent to levy and the response period expired, the failure-to-pay rate doubled. The Kwong analysis applies to the increased-rate amount the same way as the base rate — both pieces are part of the § 6651(a)(2) assessment and both carry the same 23C-date analysis.

Installment agreement reduced the rate to 0.25%

An installment agreement reduces the rate but does not eliminate the assessment. Months covered by an installment agreement still produce TC 276 entries, just at the lower rate. Those entries with 23C dates inside the disaster window are Kwong candidates.

Filing deadline for failure-to-pay refund claims

IRC § 6511 generally requires the refund claim be filed within 3 years of the original return filing or 2 years from the date the penalty was paid, whichever is later. The § 7508A(d) extension under the Kwong reading may further lengthen the window. The exact deadline depends on your filing and payment dates — confirm against your transcript before filing.

How PenaltyBack handles failure-to-pay claims

We pull your IRS account transcript, identify each TC 276 and TC 270 assessment inside the disaster window, and draft a Form 843 protective claim citing IRC § 7508A(d), Kwong v. United States, 179 Fed. Cl. 382 (Nov. 2025), and the specific 23C dates. We list interest entries (TC 196) on the same claim where applicable. We file under our authorized representative status. Our work is no-win, no-fee. The Kwong appeal is pending; the protective claim preserves your right regardless.

Frequently asked questions about failure-to-pay refunds

I filed timely but could not pay. Does Kwong apply to my failure-to-pay penalty?

Yes — § 6651(a)(2) attaches to the payment deadline, which § 7508A(d) suspends under the Kwong reading. Each TC 276 with a 23C date inside the disaster window is a candidate.

My penalty rate jumped from 0.5% to 1% after a levy notice — does the refund include the increased rate?

The Kwong analysis applies to the full TC 276 amount as assessed, including the increased-rate component. The 23C date governs.

I am on an installment agreement. Can I still file a Kwong-based refund claim?

Yes. The installment agreement governs the going-forward rate; it does not bar a refund claim on prior assessments inside the disaster window.

I paid the penalty already. Should I still file the protective claim?

Yes. Form 843 covers refund claims for amounts already paid, and the 2-year-from-payment window may still be open.

Does Kwong help with the interest that accrued on top of my failure-to-pay penalty?

Underpayment interest under § 6601 (TC 196) is conceptually distinct, but a combined Form 843 may seek both penalty refund and interest abatement under § 6404(e) on the same filing.

Related

Kwong v. United States, explained. Failure-to-file vs failure-to-pay. How to read your transcript. Form 843 protective claim wording. The IRS may owe you money from COVID.