The IRS on August 24, issued a notice which provides taxpayers with automatic relief from the failure-to-file penalty for a broad range of tax and information returns for the 2019 and 2020 tax years. This notice is likely to bring relief to an estimated 1.6 million taxpayers who have already paid these penalties. These taxpayers will be receiving an aggregate of $1.2 billion in refunds or credits due to the automatic abatement of penalties.
The purpose of this penalty relief is to help millions of struggling taxpayers who have been affected by the cataclysm of the pandemic and will also allow the IRS to restore normalcy through the piling of backlogged returns and taxpayer correspondence before the 2023 filing season starts.
The IRS also acknowledges in the notice that the additions to tax and related penalties due to timely returns continued to accrue during the presidential emergency declaration in March 2020 in response to the pandemic that consequently postponed filing dates for both years’ returns.
The AICPA and other groups and firms have repeatedly advocated that the IRS provide failure-to-file and other penalty relief under procedures similar to those for a first-time abatement administrative waiver but based upon the COVID-19 pandemic as a reasonable cause for the failure.
The IRS has stated that the taxpayers will not be required to request this relief and they will be paying most of the refunds or applying for the credits by the end of this month. However, in order to qualify for the penalty relief, the eligible return must be filed no later than September 30.
In addition, the Notice provides penalty relief to banks, employers, and other businesses required to file various information returns, such as those in the Form 1099 series. To qualify for relief, the Notice states that eligible 2019 returns must have been filed by August 3, 2020, and eligible 2020 returns must have been filed by August 2, 2021.
Tax returns eligible for relief include specified tax returns in the Form 1040, 1041, and 1120 series. Partnership (Form 1065) and S-Corporation (Form 1120-S) returns are also included within the relief. Also eligible are Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e).
The Notice also covers certain taxpayers with international reporting obligations, such as those required to file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) and Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) with their Forms 1065 and 1120, and those taxpayers reporting transactions with foreign trusts and the receipt of foreign gifts. Lastly, the Notice covers Forms 990-PF (private foundation return) and 990-T (exempt organization business income tax return).
The penalty relief provisions of the Notice do not apply in the situation of:
In addition, penalties, such as the failure-to-pay penalty, are not eligible for relief. Taxpayers who are subject to ineligible penalties may use existing penalty relief procedures, such as applying for relief under the reasonable cause criteria or the First Time Abatement program.
In addition to the exceptions provided in the Notice, the IRM provides that relief will only be granted for penalties assessed by an IRS service center or campus, not penalties assessed as a result of an IRS examination.
The IRM revisions follow the Notice in excluding any other international informational returns from penalty relief under Notice 2022-36. For example, neither Form 8938, Statement of Specified Foreign Financial Assets, nor Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, is eligible for relief. No explanation is provided as to why certain international information returns were excluded.
The IRM revisions also address whether first-time penalty abatement (FTA) will take precedence over relief provided under the Notice. The IRM clarifies that relief under Notice 2022-36 will take precedence, preserving the FTA for future use.
Because of the impending September 30, 2022 deadline, it is imperative for taxpayers who have failed to timely file 2019 and/or 2020 tax or information returns to consult with a tax professional to determine whether any noncompliance qualifies for failure-to-file penalty relief under the Notice.
We have brought this information to you on the basis of the notice released by the IRS in August 2022. You may lookup on our website for a lot of other courses on the Latest Tax Updates that would also give you continuing education credits. Subscribe to our newsletter for regular updates.
Mike Goosen, CPA
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Jason Dinesen (LPA, EA) is an entrepreneur, tax expert, and CPE Presenter. Dinesen brings over 15 years of experience helping individuals and businesses with accounting, bookkeeping, tax preparation, and business advisory in various industries. Dinesen is a regular CPE Presenter at myCPE. He has coached more than 200k+ accounting, taxes, and HR professionals on various topics of accounting, individual taxation, corporate taxation, and professional ethics. Jason has developed a strong following within the professional community for tax-related subjects. Dinesen is known for sharp tax interpretations, and he quickly brings his analysis of the latest tax updates and IRS guidance to the professional community.