This is why I am so shocked by this whole thing as I was under the same impression, that the Irish had ILR by virtue of being Irish.
So far as the return of the passports go, I'm not sure. It has been over a month since we found out that our appeal was denied and when I call and ask about this, they simply say, "put it in writing" which I've done MANY times (and faxed) with no reply. The closest thing I've gotten to an answer was when one person told me that our passports are "on hold" whatever that means. I don't think they are doing anything else with them, they're just not returning them yet...though as the appeal is over, I don't know why they need them as I was under the assumption that when you get denied, the passports and documents are returned with the decision, but obviously in this case, it wasn't so.