The IRS isn’t sending you a "gift," and they certainly aren't doing you a favor. The mainstream media is currently buzzing with headlines about how the IRS might "owe" you money for pandemic-era penalties. They frame it as a win for the little guy. They provide step-by-step guides on how to "apply" for relief.
They are missing the point entirely.
The narrative that you should be grateful for the return of penalty funds is a psychological trick designed to keep you trapped in a cycle of reactive tax management. If the IRS is offering to give back money they already took, it’s not because they found a conscience. It’s because the administrative cost of defending those penalties against a wave of legitimate disputes is higher than the cost of a blanket refund.
Stop treating tax relief like a lottery win. It’s a refund of your own capital that the government held interest-free while your business struggled through a global supply chain collapse.
The Myth of IRS Benevolence
The common consensus suggests that the IRS is providing "relief" through Failure-to-File penalty abatements for the 2019 and 2020 tax years. They call it Notice 2022-36. The "experts" tell you to check your mail, wait for a check, or file a simple form.
Here is the reality: Notice 2022-36 was a strategic retreat. During the pandemic, the IRS built up a backlog of over 8 million unprocessed returns. They were drowning. By "waiving" penalties, they weren't helping you; they were clearing their own desks so they could refocus their enforcement arms on more lucrative targets.
If you are sitting around waiting for a $500 check while ignoring the structural inefficiencies in how you track your basis or handle your payroll credits, you are losing the war to win a skirmish. I’ve seen founders pop champagne over a $2,000 penalty refund while simultaneously overpaying their quarterly estimates by $15,000 because their CPA is playing it "safe."
"Safe" is just another word for "lazy."
The Opportunity Cost of Compliance
Most articles focus on how to get the money back. No one talks about the cost of losing it in the first place. When the IRS assesses a penalty, they take liquid capital out of your ecosystem.
Imagine a scenario where a mid-sized digital agency was hit with a $12,000 failure-to-file penalty in 2020. That $12,000 didn't just sit in a vault. For that agency, it was the cost of a high-converting ad spend, a new workstation, or three months of a junior developer's salary. By the time the IRS "graciously" returns that money in 2024 or 2025, inflation has eroded its purchasing power by double digits.
You aren't getting back what you lost. You are getting back a devalued fraction of it.
Why the "How to Apply" Guides are Garbage
The "How to Apply" instructions found in most finance blogs are redundant because, for the vast majority of qualifying individuals, the process is supposed to be automatic. If you’re "applying" for something that is automated, you’re likely wasting time on a technicality or your records are so messy that the IRS’s algorithm missed you.
If you haven't received your refund yet, it’s usually for one of three reasons:
- You have an outstanding debt from another year that they’ve seized the refund to cover.
- Your return was filed so late it fell outside the "reasonable cause" window.
- Your address on file is from three moves ago.
Instead of hunting for a form, you should be hunting for a better tax strategist. A real pro would have used First Time Abate (FTA) administrative waivers years ago rather than waiting for a public notice to do the work for them.
The Real Penalty is the One You Don't See
While the public fights over crumbs from 2020, the IRS is quietly ramping up enforcement on the Employee Retention Credit (ERC) and Section 174 R&D capitalization.
The media loves the "refund" story because it’s easy. It’s "feel-good" news. But the real story is the predatory nature of the ERC mills that have put thousands of small businesses in the crosshairs of future audits. If you received a penalty refund but also claimed a questionable ERC, you didn't win. You just gave the IRS a roadmap to audit your entire 2021 and 2022 filings.
The IRS is currently sitting on a mountain of data. They are using AI—real algorithmic processing, not the buzzword variety—to flag inconsistencies between reported payroll and tax credits. If you take a penalty refund today, you are confirming your identity and your status as an active taxpayer. You are effectively waving a flag and saying, "I’m over here, and I have assets worth seizing."
Stop Being a Victim of the Tax Code
People ask, "Does the IRS owe me money?"
The answer is: "Who cares?"
If you are focused on what the IRS owes you, you are looking in the rearview mirror. You should be asking, "How do I ensure the IRS never has the opportunity to penalize me again?"
The solution isn't better filing; it's better structural engineering.
- Decentralize your tax liability. If you are operating as a simple pass-through without considering the nuances of S-Corp distributions versus guaranteed payments, you’re begging for a self-employment tax hit that dwarfs any pandemic penalty.
- Challenge the assessment immediately. Never wait for a global notice. The moment a penalty hits, you should be filing a protest based on "Ordinary Business Care and Prudence."
- Audit your own CPA. Most accountants are historians. They tell you what happened last year. You need a forecaster. If your accountant didn't mention Notice 2022-36 until you brought it up, fire them.
The IRS doesn't "owe" you. They are returning a forced, interest-free loan that they took from you during a crisis. If you treat this as a windfall, you’ve already lost the mental game of wealth preservation.
Taxation is a cost of doing business, but penalties are a choice. You chose to be disorganized, or you chose an advisor who was. Don't celebrate the return of the fine; mourn the fact that you were compliant enough to be a target in the first place.
The 2020 tax year is over. The money is worth less now than it was then. Take the check, put it into a high-yield vehicle, and stop reading guides written for people who wait for the government to fix their mistakes.
The IRS is the only organization that can rob you and then receive a thank-you note when they drop a nickel on their way out the door. Stop being the person writing the note.
