It’s a man-bites-dog story when the tax man gives money away. That’s exactly what the Internal Revenue Service (IRS) intends to do. In a seemingly unprecedented move, the IRS announced plans to return approximately $1.2 billion in penalties to about 1.6 million taxpaying companies and individuals.

IRS Notice 2022-36, issued August 24, 2022, states the IRS will automatically abate certain failure to file penalties and certain international information return penalties on tax returns for the taxable years 2019 and 2020 that are filed on or before September 30, 2022. 

This relief is yet another result of COVID-19, as the IRS acknowledged the pandemic has created an unprecedented backlog of tax returns and correspondence. The penalty relief is intended to benefit both taxpayers and the IRS, the latter by relieving its backlog. 

Such penalty relief does not include all types of penalties.  For example, the failure to pay penalties are not waived.

IRS Reasons for Providing Penalty Relief

The IRS’s reasoning for providing such unprecedented and automatic relief is included in IRS Notice 2022-36, which states:

“The COVID-19 pandemic has [also] had an unprecedented effect on the IRS’s personnel and operations. The agency [IRS] was called upon to support emergency relief for taxpayers, such as distributing economic impact payments, which sustaining its regular operations in a pandemic environment with limited resources, where employees were sometimes unable to be physically present to process tax returns and correspondence. In response to these challenges, the IRS has been working aggressively to process backlogged returns and taxpayer correspondence to return to normal operations for the 2023 filing season. The Treasury Department and the IRS have determined that the penalty relief described in this notice will allow the IRS to focus its resources more effectively, as well as provide relief to taxpayers affected by the COVID-19 pandemic.”

On the day IRS Notice 2022-36 was released, IRS Commissioner Chuck Rettig also noted:

“[P]enalty relief is a complex issue for the IRS to administer. “We’ve been working on this initiative for months following concerns we’ve heard from taxpayers, the tax community and others, including Congress. This is another major step to help taxpayers, and we encourage those affected by the is to review the guidelines [contained in Notice 2022-36].”

What Type of Tax Returns are Included?

The relief program covers most Form 1040 series returns (including 1040-NR) and 1120 series returns (including 1120-S and 1120-F), Forms 1041, 1065, 1066, 990-T, and 990-PF. 

Relief is also generally granted for penalties assessed for late filed international information returns (IIR) attached to certain income tax returns, including for example Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations); Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business); Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts); and Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b)).

The IRS has published a complete list of returns included in the IRS relief program, including any possible exceptions.

Penalty relief is not available in some situations, such as those penalties that result from fraud, penalties incorporated into an accepted offer in compromise, or penalties settled in a closing agreement or determined by a judicial proceeding. 

In addition, notable forms that are excluded from penalty relief include Form 706 (United States Estate (and Generation-Skipping Transfer); Form 709 (United States Gift (and Generation-Skipping Transfer); Form 990 (Return of Organization Exempt from Income Tax); Form 8938 (Statement of Specified Foreign Financial Assets); and FBARs (FinCEN Report 114).

If Eligible, How Does One Obtain Relief?

The relief is automatic, so taxpayers don’t need to apply. Accordingly, there is no reason to call the IRS or do anything else at this time. The IRS stated expects to refund most taxpayers by the end of September 2022, although it could realistically be later. 

What If I Have Not Yet Filed for 2019 or 2020?

If you have not yet filed outstanding tax returns and/or international information returns listed in IRS Notice 2002-36 for the tax years 2019 and 2020, you should consider acting quickly to file the outstanding returns by September 30, 2022, in order to obtain the automatic late filing penalty relief. 

Feel free to contact Procopio’s tax attorneys if you have any questions or need any assistance.