Failure-to-File vs Failure-to-Pay: Which COVID-Era IRS Penalties May Be Refundable

In one paragraph

Failure-to-file (IRC § 6651(a)(1)) and failure-to-pay (IRC § 6651(a)(2)) are different IRS penalties with different math. Failure-to-file is 10x larger per month than failure-to-pay (5% vs. 0.5% of unpaid tax) and is the bigger refund opportunity for most COVID-era taxpayers. Under the Kwong v. United States reasoning, both may be refundable for assessments tied to deadlines that fell inside the COVID disaster window (January 20, 2020 – July 10, 2023). The standard three-year refund-claim deadline is July 10, 2026.

The two penalties at a glance

Source: IRC § 6651, IRS Publication 17, IRS Publication 55B. Refund eligibility under Kwong v. United States is not guaranteed; the ruling is currently being appealed.

How the failure-to-file penalty is calculated

The failure-to-file (FTF) penalty under IRC § 6651(a)(1) is 5% of the unpaid tax for each month or fraction of a month the return is late, capped at 25% (50 months would be the maximum, but the cap reaches 25% after 5 months).

Two practical features:

• "Fraction of a month" counts as a full month. A return filed one day late triggers the first month's 5% penalty.
• The base is "tax shown on the return" minus any payments already made. If the taxpayer paid the tax in full by the due date but filed late, there is no FTF penalty (the unpaid balance is zero).

For COVID-era refund analysis: a taxpayer who filed a 2020 return on August 1, 2021 (after the standard April 2021 due date and after the IRS's COVID-extended May 17, 2021 due date) would have been assessed FTF penalties for May, June, July, and August 2021 — approximately 4 months × 5% = 20% of the unpaid 2020 tax. If the unpaid tax was $5,000, the FTF penalty was about $1,000. Under the Kwong reasoning, that $1,000 may be refundable as a Form 843 claim.

How the failure-to-pay penalty is calculated

The failure-to-pay (FTP) penalty under IRC § 6651(a)(2) and (a)(3) is 0.5% of the unpaid tax for each month or fraction of a month the tax remains unpaid, also capped at 25%. Three practical features:

• The rate doubles to 1% per month after the IRS issues a Notice of Intent to Levy and 10 days pass without payment.
• The rate drops to 0.25% per month if the taxpayer is on an installment agreement.
• FTP runs even after FTF caps out. Five months of late filing triggers the 25% FTF cap, but FTP keeps accruing month by month until tax is paid or the FTP cap is also reached.

For COVID-era analysis: a taxpayer with $5,000 in unpaid 2020 tax that remained unpaid for 12 months would have been assessed about 12 × 0.5% = 6% in FTP penalties — roughly $300. Smaller per-month than FTF, but accrues for longer.

The combined cap and why it matters for the math

IRC § 6651(c)(1) provides that when both FTF and FTP apply for the same month, the FTF rate is reduced by the FTP rate for that month. The combined per-month penalty stays at 5%, not 5.5%. After 5 months, both have hit their statutory caps for any tax that remained unpaid that long.

For the typical COVID-era late-filer, this means the bulk of the penalty exposure is in the FTF for the first 5 months, plus continuing FTP after the FTF caps out if the tax is still unpaid. Refund analysis should look at FTF first and FTP second, but both are within the Kwong reasoning if the underlying due date fell in the disaster window.

Why the timing of the assessment matters under Kwong

The Kwong court held that IRC § 7508A(d) suspended the statutory deadlines used to compute FTF and FTP penalties for the entire COVID-19 federal disaster window (January 20, 2020 – July 10, 2023). For penalty math, this matters in three places:

1. The "required to be paid" date for FTP. If the original due date for the tax fell inside the suspended window, § 7508A(d) treats the deadline as suspended.
2. The "filed within the time prescribed" date for FTF. The filing deadline used to compute FTF was suspended for the disaster window.
3. The accrual months between the original deadline and July 10, 2023. If the IRS assessed penalties for months that fell inside the suspended window, those penalty amounts may be refundable on a Form 843 claim.

International information return penalties — bigger numbers, same framework

Late-filing penalties on international information returns are not technically § 6651 penalties — they have their own statutes — but the Kwong reasoning applies wherever a deadline falls inside the disaster window. For most international returns, that includes:

• Form 8938 (FATCA): $10,000 per return, plus $10,000 per 30 days for continued failure (max $50,000+)
• Form 5471 (foreign corporation reporting): $10,000 per return, plus $10,000 per 30 days after IRS notice
• Form 5472 (25% foreign-owned U.S. corporation reporting): $25,000 per return
• Form 1099 / 1095 (information returns): ~$310 per return, with much higher penalties for intentional disregard

Per-taxpayer exposure is often substantially larger for international information returns than for individual income tax penalties. A protective claim under Kwong may be the only mechanism to recover those amounts before the § 6511 deadline closes.

Estimated-tax penalties under §§ 6654 and 6655

Estimated-tax penalties for individuals (§ 6654) and corporations (§ 6655) are computed as interest on the underpayment for each missed quarterly installment. The Kwong reasoning would apply where the missed quarterly due date fell inside the disaster window.

Quick eligibility worksheet

1. Pull the IRS account transcript for the affected year.
2. Identify the original return due date (typically April 15 of the year after the tax year).
3. Check whether that date falls between January 20, 2020 and July 10, 2023.
4. If yes: list every penalty and interest assessment tied to that year on the transcript.
5. If no: the year is generally not within the Kwong reasoning, though specific facts may apply.
6. Calculate the dollar amount of each in-window assessment.
7. Decide whether to file a refund claim or a protective claim. The Taxpayer Advocate has recommended protective claims while the appeal is pending.

Frequently asked questions

If I had both FTF and FTP for the same year, do I file one Form 843 or two?

One Form 843 per tax year, listing the total of both penalties. Multiple years require separate filings.

Do I need to recompute the math myself, or can I just claim the assessed amount?

For a refund claim, list the exact assessed amount from the IRS account transcript. For a protective claim, the dollar figure can be approximate.

What about interest charges on the unpaid tax?

Interest on unpaid tax (transaction code 196) is computed under IRC § 6601 and runs separately from FTF/FTP. The Kwong reasoning extends to interest tied to a payment date inside the suspended window.

Does Kwong apply if I never paid the penalty — just had it assessed?

A refund claim requires payment. If a penalty was assessed but never paid, the equivalent action is an abatement claim. Form 843 is used for both.

If I already received relief under Notice 2022-36 or 2024-07, can I claim more under Kwong?

Possibly. The earlier notices provided narrow, time-limited relief. The Kwong reading is broader, so additional refunds outside the narrow notice scope may be available.

Is there a downside to filing a protective claim if Kwong is overturned?

Under PenaltyBack's no-win, no-fee model, no out-of-pocket cost. If Kwong is overturned and the protective claim is denied, the taxpayer owes nothing.

What if my penalty was assessed in 2024 for a 2020 return I filed late?

The relevant question is the original due date of the return, not the date the penalty was assessed.