Earlier this month the IRS announced sweeping penalty relief for millions of taxpayers who filed their 2019 and/or 2020 tax returns late. See IRS Notice 2022-36; IR-2022-155. The relief is targeted at taxpayers who may have struggled in the wake of the Covid-19 pandemic, but it is not limited to only those taxpayers. Instead, taxpayers who filed late returns for any reason should be eligible for relief.
The relief applies to the failure to file penalty under IRC § 6651(a)(1). The failure to file penalty can quickly result in a significant addition to tax – it is calculated at 5% of the tax liability for each month the return is filed late (up to a maximum of 25%).
The IRS will grant relief on the following 2019 and 2020 returns: most Form 1040 (individuals) and Form 1120 (corporations) returns, Form 1041 (estates and trusts); Form 1065 (partnerships); Form 1066 (REMIC); Form 990-T (exempt organizations); and Form 990-PF (private foundations). In addition, the relief applies to several international informational or other filings: Forms 5471 and 5472 (foreign corporations); Form 3520 (foreign trust transactions and gifts); and Form 3520-A (US owners of foreign trusts). It is expected that IRS will add several more forms to the list qualifying for penalty relief.
Penalty relief is not available for fraud penalties, penalties a taxpayer has already accepted in connection with an offer-in-compromise, a closing agreement, or a court order.
For taxpayers who previously filed delinquent returns and were assessed the failure to file penalty, the penalty should be automatically removed by the end of September 2022. If a taxpayer previously requested abatement of the penalty and the IRS denied the request, it should be automatically granted. In the event that the abatement of the penalty results in a refund, it will be applied to any other outstanding balance and the balance will be paid to the taxpayer by check – there is no option for direct deposit for this initiative.
Notably, the penalty relief also applies for taxpayers who, to date, have still not filed a 2019 or 2020 tax return provided that such taxpayers file the delinquent returns on or before September 30, 2022.