IRS Offers Limited Penalty Relief for Late-Filed Tax Returns

 In IRS Problems, Tax Debt, Tax Filing

Christmas has come a bit early this year for millions of taxpayers who filed late tax returns for tax years 2019 and 2020. The IRS recently announced in Notice 2022-36 that it will be providing automatic penalty relief to individuals and businesses who failed to file a timely tax return. This relief applies to 2019 and 2020 tax returns that are filed on or before September 30, 2022. Additionally, relief is offered for certain information return penalties with respect to 2019 returns filed on or before August 1, 2020, and 2020 returns filed on or before August 1, 2021.

Why Is the IRS Providing This Relief?

When this relief was announced by the IRS, I (like many of you who may be reading this) was initially quite flabbergasted! It is very rare that the IRS makes such a sweeping move, of its own volition, to financially assist taxpayers without Congressional action. But upon reading further and thinking about how these past few years have played out from a practitioner’s perspective, it makes perfect sense. Taxpayers were dealing with pandemic-related challenges that affected their own health, the health of their families, the availability of their tax preparers, the loss of and other impacts to their employment, and the financial status of their businesses. In addition, the IRS was dealing with pandemic-related challenges that affected the ability of taxpayers to receive the customer service they needed via phone, shutdowns of in person service centers, and impediments to processing returns and refunds. The combination of all these factors resulted in many taxpayers who normally file timely returns falling behind schedule with their return submissions.

What Tax Returns Are Eligible for This Relief?

Commonly filed tax returns that qualify for relief from the failure-to-file penalty under this notice include 2019 and 2020 tax returns of the following varieties that are filed on or before September 30, 2022:

  • Form 1040 (Individual Income Tax Return)
  • Form 1041 (Income Tax Return for Estates and Trusts)
  • Form 1120 (Corporation Income Tax Return)
  • Form 1065 (Return of Partnership Income)
  • Form 1120S (Income Tax Return for an S Corporation)

Additionally, the notice applies to late filing penalties assessed under section 6038 for Form 5471 and Form 5472. Although the tax return penalties listed in the above bulleted list can be quite substantial, the late filing penalties under 6038 can amount to $25,000 per instance. I have seen several small business owners struggle to contest these penalties on their own, and many have reached out to me in recent months for assistance in abating penalties that are so substantial that they can significantly hinder the business’s continued operations.

How Will the IRS Administer This Relief?

One of the most beneficial aspects of this penalty relief is that it will apply automatically. Yes, you read that right! This means that if you have received a notice for failure-to-file penalty for a 2019 or 2020 tax return submitted on or before September 30, 2022, and you haven’t paid it yet, the IRS will automatically take care of waiving this penalty for you. According to the Notice, you will not have to wait on the phone, send a letter, or pay a visit to your local IRS office to receive this relief. On the other hand, if you actually paid the penalty when you got your letter assessing a failure-to-file penalty, the IRS will be automatically issuing you a refund. The logistics of how this refund will happen have not been disclosed at this time, but if your address has recently changed, it is advisable that you update it with the IRS as soon as possible, given that the refund may be issued via check.

Final Thoughts

I have already seen this relief impact several clients and potential clients who have been assessed late filing penalties during the pandemic, some to the tune of thousands of dollars! It is comforting to see the IRS do the right thing in this situation, especially given that part of the blame can be squarely placed on pandemic-related challenges that the agency has faced, which affected taxpayers’ ability to file timely returns. However, important to note is that this relief does not apply to the failure-to-pay penalty or interest attributable to these tax years. The logic is that we have a pay-as-you-go tax system, in which taxpayers are required to pay their taxes regularly throughout the year. But the failure-to-file penalties tend to be significantly higher than the failure-to-pay penalties and interest in most cases, so I am very glad to see that the IRS has offered this waiver of the failure-to-file penalty to taxpayers. We will see if some of the states will follow suit by offering similar relief.

If you have received a tax notice from the IRS that does not qualify for relief under Notice 2022-36 and would like a practitioner’s assistance in resolving it, please contact me utilizing the form below.

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