In recent weeks, the Internal Revenue Service (IRS) has received coverage (and criticism) for the increased budget allocated to the agency under the Inflation Reduction Act of 2022. However, last week, the IRS announced news that will provide welcome support to both businesses and individuals – a waiver on for late returns files in 2019 and 2020. On Aug. 24, 2022, the Internal Revenue Service announced, in Notice 2022-36, penalty relief for individuals and businesses who file certain 2019 or 2020 returns late.
To qualify for this relief, any eligible income tax return must be filed on or before Sept. 30, 2022. Penalty assessments for late returns that have already been filed will be refunded, credited or abated automatically. For other late returns that have not yet been filed, it is imperative to file these returns on or before Sept. 30, 2022 in order to obtain penalty relief. Nearly $1.2 billion in penalty refunds or credits will be issued automatically, according to the IRS.
Within its notice, the IRS cites a desire to ease burdens on taxpayers hit by the pandemic during the years for which it is waiving penalties. The notice also cites a desire to “to process backlogged returns and taxpayer correspondence to return to normal operations for the 2023 filing season” as a reason for the relief. The penalty waiver will allow the agency to dedicate resources more effectively, according to the notice.
This opportunity could remediate a broad spectrum of filing deficiencies that involve (among others) Forms 1040, 1041, 1120, 1120S, 1065, 5471, 5472, 3520, 3520-A, 990-PF and 990-T.
Who is Eligible for Penalty Relief
In order to qualify for penalty relief, the individual or business must:
1. Be required to file a “specified tax return” listed below for either the 2019 or 2020 taxable year;
2. File the specified tax return on or before Sept. 30, 2022; and
3. Be subject to the failure to file penalty listed in Notice 2022-36.
The penalty for income tax returns is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a return is filed late. The penalty for Form 1065 or 1120S that is applicable to the 2020 tax year is $210 per owner, per month (or fraction thereof), up to a maximum penalty per owner of $2,520. Certain other returns listed in Notice 2022-36 (such as Forms 5471 and 5472) are subject to a flat $10,000 penalty per information return, plus an additional $10,000 for each month a failure continues after the IRS notification of the failure (up to a $60,000 per return maximum). Other international returns listed in Notice 2022-36 (i.e., Forms 3520 and 3520-A) are potentially subject to even higher penalties (e.g., 35% of the gross value of property transferred to, or received from, a foreign trust and 5% of the gross value of a foreign trust’s assets treated as owned by a U.S. person).
Automatic Relief for Penalty Assessments on Previously Filed Returns
Relief from the penalties is automatic, which means that eligible taxpayers need not apply for it. If already assessed, penalties will be abated. If already paid, the taxpayer will receive a credit or refund. According to IRS Commissioner Chuck Rettig, “This penalty relief will be automatic for people or businesses who qualify; there’s no need to call.” The IRS indicated in IR-2022-155 that the agency will make many of the automatic refunds or credits by the end of September.
Specified Tax Returns Subject to Listed Penalties
The following lists specified 2019 and 2020 tax returns receiving failure to file penalty relief indicated in Notice 2022-36:
- 1. Additions to tax under section 6651(a)(1) for failure to file the following income tax returns:
a. Form 1040
b. Form 1040-NR
c. Form 1040-NR-EZ
d. Form 1040 (PR)
e. Form 1040-SR
f. Form 1040-SS
g. Form 1041
h. Form 1041-N
i. Form 1041-QFT
j. Form 1120
k. Form 1120-C
l. Form 1120-F
m. Form 1120-FSC
n. Form 1120-H
o. Form 1120-L
p. Form 1120-ND
q. Form 1120-PC
r. Form 1120-POL
s. Form 1120-REIT
t. Form 1120-RIC
u. Form 1120-SF
v. Form 1066
w. Form 990-PF
x. Form 990-T
- 2. Certain penalties under sections 6038, 6038A, 6038C, 6039F and 6677 for failure to timely file the following returns:
a. Form 5471 that is attached to a late-filed Form 1120 or Form 1065
b. Form 5472 that is attached to a late-filed Form 1120 or Form 1065
c. Form 3520
d. Form 3520-A
- 3. Penalties under section 6698(a)(1) for failure to timely file and under section 6698(a)(2) for failure to show the required information on:
a. Form 1065
- 4. Penalties under section 6699(a)(1) for failure to timely file and under section 6699(a)(2) for failure to show the required information on:
a. Form 1120S
Other Penalty Relief for Information Returns
Notice 2022-69 provides additional penalty relief for a failure to timely file certain Form 1099 series information returns. Specifically, penalty relief applies for 2019 returns that were filed on or before Aug. 1, 2020, or 2020 returns that were filed on or before Aug. 1, 2021. Because both of these deadlines fell on a weekend, a 2019 return will still be considered timely for purposes of relief provided under the notice if it was filed by Aug. 3, 2020, and a 2020 return will be considered timely for purposes of relief provided under the notice if it was filed by Aug. 2, 2021.
Noteworthy Returns Not Eligible for Penalty Relief
Not all the failure to file penalty relief provisions are listed by Notice 2022-36. For instance, the failure to file penalty for exempt organizations returns, Form 990 and 990-EZ, are not listed as eligible for relief.
Meanwhile, certain other returns are subject to the penalty provisions listed in Notice 2022-36, but were curiously omitted from the list of specified tax returns. For instance, Forms 706, 709, 8858 and 8865 are subject to the failure to file penalty listed on Notice 2022-36, but are not among the specified tax returns identified in Notice 2022-36. Furthermore, Forms 5471 that are attached to a late-filed Form 1040 or Form 1120S apparently are not eligible for penalty relief either.
In short, penalty relief is available only for the list of specified tax returns in Notice 2022-36. This means that Forms 990, 990-EZ, 706, 709, 8858, 8865 and any other return that is not identified in the list of specified tax returns are not eligible for penalty relief under Notice 2022-36. Oddly, a late-filed Form 5471 is eligible for penalty relief if it is attached to Form 1120 or Form 1065, but is not eligible for penalty relief if it is attached to Form 1040 or Form 1120S.
Other Exceptions to Penalty Relief
Penalty relief is not available in some situations, such as where a fraudulent return was filed, where the penalties are part of an accepted offer in compromise or a closing agreement, or where the penalties were finally determined by a court. Hence, taxpayers that may have entered into a closing agreement at the conclusion of an examination are not eligible for refunds with respect to penalties that may have been part of the closing agreement.
The relief in Notice 2022-36 is limited to the penalties specifically listed. Other penalties, such as the failure to pay penalty, are not eligible.
Although penalty relief is automatic, protesting penalty assessments to the extent the situation involves a listed penalty for a specified tax return is still encouraged. For example, unresolved IRS correspondence pertaining to a listed penalty for a specified tax return should not be ignored, even though Notice 2022-36 grants automatic relief.
The new penalty relief represents an opportunity to remediate a broad spectrum of filing deficiencies for specified tax returns. Should you have any questions concerning this new penalty relief for the 2019 and 2020 tax years, please contact us.
Published on August 29, 2022