Penalty relief for struggling taxpayers affected by the COVID-19 pandemic is now available to most people and businesses who file certain 2019 or 2020 returns late. Eligible income tax returns must be filed on or before September 30, 2022, to qualify for this relief. Furthermore, the nearly 1.6 million taxpayers who have already paid these penalties will automatically receive more than $1.2 billion in refunds or credits. Many of these payments will be completed by the end of September.

The COVID-19 pandemic had an unprecedented effect on the IRS’s personnel and operations. The penalty relief is expected to help the IRS focus its resources on processing backlogged tax returns and taxpayer correspondence to return to normal operations for the 2023 filing season.

Failure to File Penalty

The relief applies to the failure to file penalty, typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. This relief applies to forms in both the Form 1040 and 1120 series, as well as others such as Form 1041, U.S. Income Tax Return for Estates and Trusts.

Penalty Relief for Information Returns

Penalty relief is also available to banks, employers, and other businesses required to file various information returns, such as those in the 1099 series. To qualify for this relief, eligible 2019 returns must have been filed by August 1, 2020, and eligible 2020 returns must have been filed by August 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 August 3, 2020, and a 2020 return will be considered timely for purposes of relief provided under the notice if it was filed by August 2, 2021.

Penalty relief for filers of various international information returns, such as those reporting transactions with foreign trusts, receipt of foreign gifts, and ownership interests in foreign corporations, is also available. To qualify for this relief, any eligible tax return must be filed on or before September 30, 2022.

Penalty Relief is Automatic

Eligible taxpayers do not need not apply for it. If penalties were already assessed, they will be abated. If already paid, the taxpayer will receive a credit or refund. 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.

Taxpayers should note that this relief is limited to failure to file penalties. Other penalties, such as the failure to pay penalty, are not eligible; however, taxpayers may use existing penalty relief procedures for these ineligible penalties, such as applying for relief under the reasonable cause criteria or the First Time Abate program.

If you have questions, please call the office for more information.