On 24-August-2022, the IRS announced they will provide penalty relief to most people and businesses who file late 2019 or 2020 returns. Additionally, the IRS said taxpayers who already paid these penalties will automatically receive a refund by the end of September. The IRS expects nearly 1.6 million taxpayers will receive more than $1.2 billion in refunds.
To qualify for this penalty relief, any eligible income tax return must be filed on or before 30-September 2022. We urge any clients that have not yet filed 2019 or 2020 returns – particularly if they expect tax due – to contact us immediately and we will try to submit in time.
The main purpose of the relief is to help struggling taxpayers affected by COVID-19. However, it is also designed to help the IRS focus its resources on processing backlogged tax returns and improve taxpayer correspondence. With the expanded budget going forward, we are hopeful the IRS will improve the timing of processing tax returns as well as respond more efficiently in communications. Many of our clients have felt the pain over the past two years in slow IRS response time and this will hopefully improve in the future.
The relief applies specifically to the failure to file penalty (interest, failure to pay, etc will still apply). The failure to file penalty is typically 5% per month (up to 25%) of the unpaid tax when a federal income tax return is filed late. For example, if you owe $5,000 the penalty is $250 per month up to a maximum of $1,250.
The Federal income tax returns include most Personal (Form 1040) and Corporations (Form 1120). Additionally, Form 1041, 1065, 1066, 990-T and 990-PF.
The IRS also announced additional relief for filers of various foreign informational returns, such as transactions with foreign trusts, receipt of foreign gifts, and ownership in foreign corporations. This includes Forms 5471, 5472, 3520, and 3520-A.
In cases where the relief of penalties results in a refund, the balance will first be applied to any outstanding liabilities for the taxpayer. Any remaining refund will be paid by check and mailed to taxpayers’ current address in the IRS system. There is not an option for direct deposit.
Bottom Line: Most taxpayers do not need to do anything. If you already filed the 2019 and 2020 tax returns, the IRS will automatically remove the failure to file penalties where applicable. However, for anyone that has not yet submitted a 2019 or 2020 tax return and expect tax due, it is very important they submit return by 30-September-2022.