Any question answered...

So apparently taxes can be refunded on flights you don't make. However, often there is service fee to get them back. In my case, however, Icelandair is claiming that by not flying both legs of my journey, the first leg is retroactively more expensive, and they're using the taxes to pay for that increase in cost.

Any thoughts on the legality of this? Seems sketchy.

I've booked flights before where the two legged return was £500 cheaper than a single so it's not that surprising (I booked a return and only used the first leg, you can't do it the other way round as if you don't use the outbound then they'll cancel the return).

Have a look on the Icelandair website to see what the single flight cost is. If it's more expensive then you're probably screwed.