Automatic but limited IRS penalty relief

| 9/1/2022
Automatic but limited IRS penalty relief

The IRS recently published a news release and Notice 2022-36, which provide penalty relief for certain failure to file penalties, international information return penalties, and information return penalties imposed for 2019 and 2020. The IRS acknowledged that it continues to face operational challenges stemming from the COVID-19 pandemic and that it believes the relief granted in Notice 2022-36 will allow it to focus its resources more effectively, including on reducing its backlog of unprocessed returns, and prepare for the 2023 filing season.

Relief under the notice is not available except under specific circumstances. In addition, penalty relief is not available for penalties in cases of fraud, in accepted offers in compromise, for amounts settled in a closing agreement, or for amounts finally determined in a judicial proceeding.

Taxpayers not eligible for relief under the notice still might be eligible for penalty relief under the IRS’ first-time abatement (FTA) policy or for reasonable cause. According to a blog post by the National Taxpayer Advocate, receiving IRS penalty relief under the notice should not affect whether a taxpayer will qualify for FTA relief or reasonable cause in future years.

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Penalties abated and refunded

Penalties will be abated and, if already paid, refunded automatically under the following scenarios for returns filed on or before Sept. 30, 2022, for taxable years ending in 2019 and 2020.

1. Penalties under 6651(a)(1) for failure to timely file the following returns:

Form 990-PF

Form 1040-SR

Form 1120

Form 1120-ND

Form 990-T

Form 1040-SS

Form 1120-C

Form 1120-PC

Form 1040

Form 1041

Form 1120-F

Form 1120-POL

Form 1040-C

Form 1041-N

Form 1120-FSC

Form 1120-REIT

Form 1040-NR-EZ

Form 1041-QFT

Form 1120-H

Form 1120-RIC

Form 1040-PR

Form 1066

Form 1120-L

 


2. Penalties under Sections 6038, 6038A, 6038C, 6039F, and 6677 for failure to timely file the following international information returns if the penalties were either:

  • Systematically assessed when Form 5471 or Form 5472 was attached to a Form 1120 or Form 1065 that was filed late
  • Assessed related to filings on Form 3520 and Form 3520-A

This category of relief is limited strictly to the forms listed in the table. IRS penalty relief under Notice 2022-36 does not apply to penalties related to other international information returns, such as Form 8865, or penalties imposed with respect to Form 5471 and Form 5472 when these are attached to forms other than late-filed Form 1120 or Form 1065. For instance, a late-filed Form 5471 or Form 5472 attached to Form 1040, Form 1041, or forms in the 990 series is not eligible for penalty relief under the notice. Additionally, a Form 5471 or Form 5472 attached to a Form 1120 or Form 1065 is not eligible for IRS penalty relief under the notice.

3. Penalties under Sections 6698 and 6699 for failure to timely file and to show the information required on Form 1065 and Form 1120-S.

2019 and 2020 information returns

Penalties imposed under Section 6721(a)(2)(A) for failure to timely file information returns defined in Section 6724(d)(1), such as Form 1099 and similar forms, that meet the following criteria will be abated, and already paid amounts will be refunded automatically:

  • 2019 information returns that were filed before Aug. 3, 2020, with an original due date of Jan. 31, 2020; Feb. 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically); or March 15, 2020
  • 2020 information returns that were filed before Aug. 2, 2021, with an original due date of Jan. 31, 2021; Feb. 28, 2021 (if filed on paper) or March 31, 2021 (if filed electronically); or March 15, 2021

Next steps

While the IRS penalty relief is automatic and clearly a positive development for certain taxpayers, it is likely that there could be bumps in the road in the IRS’ implementation of the relief, and, as such, taxpayers should carefully monitor developments in this area. In addition, penalty relief under the notice is limited and does not apply to many scenarios in which taxpayers were affected by the pandemic. Taxpayers that believe they might be eligible should consult with their tax advisers to confirm eligibility and work through any issues if automatic refunds are not received.

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax
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Adam Silva
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Lauren Owens