IRS provides penalty relief for certain 2019 and 2020 tax returns

August 2022

In brief

The IRS on August 24 issued Notice 2022-36 providing relief for certain individual and business taxpayers affected by the COVID pandemic from certain failure-to-file penalties and certain international information return (IRR) penalties with respect to tax returns for tax years 2019 and 2020 (which were due in 2020 and 2021) filed on or before September 30, 2022. 

The Notice also provides relief from certain information return penalties with respect to tax year 2019 returns filed on or before August 1, 2020, and with respect to tax year 2020 returns filed on or before August 1, 2021. 

The IRS on August 24 also issued a News Release (IR-2022-155) stating that the agency by the end of September expects to issue more than $1.2 billion in refunds or credits to many of the nearly 1.6 million taxpayers who already paid these penalties.   

IR-1022-155 also states that this penalty relief will allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help the agency return to normal operations for the 2023 filing season.

Note: The IRS currently is working to develop detailed FAQs to provide additional guidance and clarification around this penalty relief.

Action items: Taxpayers who have not yet filed 2019 or 2020 returns covered by this Notice should act promptly to file by September 30, 2022 to qualify for the penalty relief. Taxpayers who are uncertain as to whether they have had any of these penalties previously assessed or offset against other overpayments should consider obtaining updated IRS account transcripts to determine their penalty status.

In detail

Waiver and abatement of certain penalties

The Notice provides penalty relief with respect to specified tax returns for tax years 2019 and 2020 filed by September 30, 2022. The relief applies to the failure-to-file penalty, which typically is assessed at a rate of 5% per month up to 25% of the unpaid tax when a federal income tax return is filed late.  

The penalties listed below automatically will be abated, refunded, or credited, as appropriate, without any need for taxpayers to request this relief. Taxpayers who already have paid these penalties will receive a credit or refund.

  • Additions to tax under Section 6651(a)(1) for failure to file the following income tax returns:

o   Form 1040 filers:

o   Form 1040, U.S. Individual Income Tax Return

o   Form 1040-C, U.S. Departing Alien Income Tax Return

o   Form 1040-NR, U.S. Nonresident Alien Income Tax Return

o   Form 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents

o   Form 1040 (PR), Federal Self-Employment Contribution Statement for Residents of Puerto Rico

o   Form 1040-SR, U.S. Tax Return for Seniors; and 

o   Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico).

o   Form 1041 filers:

o   Form 1041, U.S. Income Tax Return for Estates and Trusts; 

o   Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts; and

o   Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts.

o   Form 1120 filers:

o   Form 1120, U.S. Corporation Income Tax Return

o   Form 1120-C, U.S. Income Tax Return for Cooperative Associations

o   Form 1120-F, U.S. Income Tax Return of a Foreign Corporation

o   Form 1120-FSC, U.S. Income Tax Return of 6 a Foreign Sales Corporation

o   Form 1120-H, U.S. Income Tax Return for Homeowners Associations

o   Form 1120-L, U.S. Life Insurance Company Income Tax Return

o   Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons

o   Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return

o   Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations

o   Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts

o   Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies; and

o   Form 1120- SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B).

o   Form 1066 filers:

o   Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return

o   Form 990 filers:

o   Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation

o   Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e))

  • Certain penalties under Sections 6038, 6038A, 6038C, 6039F, and 6677 for failure to timely file the following IIRs:

o   Penalties systematically assessed when a Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and/or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is attached to a late-filed Form 1120 or Form 1065; and

o   Penalties assessed by the campus assessment program with respect to filings on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b))

  • Certain penalties under Sections 6698(a)(1) and 6699(a)(1) for failure to timely file and certain penalties under Sections 6698(a)(2) and 6699(a)(2) for failure to show the required information:

o   Penalties under Section 6698(a)(1) for failure to timely file and under Section 6698(a)(2) for failure to show the required information on a Form 1065, U.S. Return of Partnership Income;

o   Penalties under Section 6699(a)(1) for failure to timely file and under Section 6699(a)(2) for failure to show the required information on a Form 1120-S, U.S. Income Tax Return for an S corporation

In addition, the IRS will not impose the penalties under Section 6721(a)(2)(A) for failure to timely file any information return (as defined in Section 6724(d)(1)) that meets the following criteria:

  • 2019 returns that were filed on or before August 1, 2020, with an original due date of (1) January 31, 2020; (2) February 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically); or (3) March 15, 2020; or
  • 2020 returns that were filed on or before August 1, 2021, with an original due date of (1) January 31, 2021; (2) February 28, 2021 (if filed on paper) or March 31, 2021 (if filed electronically); or (3) March 15, 2021.

Observation: The Notice covers only penalties that are automatically assessed; filings (e.g., Forms 5471 and 5472 attached to a Form 1040 or Form 1041) with no automatic assessment are not covered.  

Exceptions

Penalty relief provided in this Notice does not apply to any penalties:

  • Not specifically listed in the Notice‚Äôs grant of relief,
  • For fraudulent failure to file under Section 6651(f),
  • For fraud under Section 6663,
  • In an accepted offer in compromise under Section 7122, 
  • Settled in a closing agreement under Section 7121 or finally determined in a judicial proceeding, or
  • Assessed as a result of an IRS exam.

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Kevin Brown

Principal, Tax Controversy and Regulatory Services Leader, PwC US

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