IRS provides automatic relief for late filed 2019 and 2020 returns; penalties paid to be refunded

In a rare move, the IRS announced today, August 24, that it will automatically waive penalties for most individuals and businesses who failed to file their 2019 and 2020 returns on time.

The Agency also announced that they would automatically issue refunds to taxpayers who have already paid their penalties.

Reasons for the IRS penalty relief

According to the IRS, the automatic penalty relief and penalty refunds for 2019 and 2020 returns that weren’t filed on time is being done for more than one reason.

Struggling taxpayers will be helped by IRS penalty relief and automatic penalty refund

Many taxpayers were negatively affected by the COVID-19 pandemic, and filing their taxes was the last thing on their minds. By waiving penalties on 2019 and 2020 income tax returns filed on or before September 30, 2022, the IRS reduced the financial stress on those businesses and individuals concerned about late filing and penalties.

And with close to 1.6 million taxpayers receiving more than $1.2 billion in refunds or credits by the end of September, many taxpayers will welcome that additional money back in their bank account

IRS backlog will be reduced by Agency Penalty Relief

The IRS says it is also taking this step to better focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.

“Throughout the pandemic, the IRS has worked hard to support the nation and provide relief to people in many different ways,” said IRS Commissioner Chuck Rettig. “The penalty relief issued today is yet another way the agency is supporting people during this unprecedented time.”

Returns Types affected by the IRS penalty relief

Income tax returns

According to the IRS, most businesses and individuals who failed to file their 2019 or 2020 income tax returns on time (July 15, 2019, and May 17, 2020. respectively) will be eligible for the automatic failure-to-file penalty abatement and refund. See penalty relief details further in this article for more detailed information.

Certain information returns are also affected by the IRS penalty relief

The IRS indicated that it is also providing penalty relief to banks, employers, and other businesses required to file various information returns, such as those in the 1099 series.

To qualify for relief, the notice states that eligible 2019 returns must have been filed by August 03, 2020, and eligible 2020 returns must have been filed by August 02, 2021.

The notice also provides details on relief for filers of various international information returns, such as those reporting transactions with foreign trusts, receipt of foreign gifts, and ownership interests in foreign corporations. To qualify for this relief, any eligible tax return must be filed on or before September 30, 2022.

Notice 2022-36 provides details on the information returns that are eligible for relief.

IRS penalty relief details

The IRS automatic penalty relief applies to the failure to file penalty. The penalty is typically assessed at a rate of 5% per month, up to 25% of unpaid tax, when a federal income tax return is filed late. This relief applies to forms in the Form 1040 and 1120 series and others listed in Notice 2022-36. 

To qualify for this relief, any eligible income tax return must be filed on or before September 30, 2022.

The Agency’s automatic penalty relief does not apply to the failure-to-pay penalty that applies whether or not a return was filed on time, if any tax due wasn’t paid on time. 

For this and other ineligible penalties, taxpayers may use existing penalty relief procedures, such as applying for relief under the reasonable cause provision by filing Form 843 and a letter citing reasonable cause or by calling the IRS to request a first-time penalty abatement.

Penalty relief is automatic

Most of the $1.2 billion in refunds will be delivered to eligible taxpayers by October 01, since the IRS penalty relief is automatic. There is no need for eligible taxpayers, or their tax professionals, to apply for it.

• If a penalty has already been assessed, it will be abated.
• If a penalty has already been paid, the taxpayer will receive a credit or refund.

As a result, nearly 1.6 million taxpayers who already paid the penalty are receiving refunds totaling more than $1.2 billion. Most eligible taxpayers will receive their refunds by the end of September.

Notice 2022-36 provides detail where the penalty abatement will not apply.

One of my clients used the first-time penalty abatement penalty for an eligible return… What now?

Though not explicitly covered in the notice, if a taxpayer has used the first-time penalty abatement process for an eligible return, I suggest you (or your client) send a letter to the IRS requesting that it be restored for future use in light of the penalty relief granted in this notice.