Individual and business taxpayers who filed their 2019 or 2020 returns late due to the COVID pandemic will be granted penalty relief by the Internal Revenue Service. The IRS will be refunding $1.2 billion in penalties to 1.6 million taxpayers who filed late in 2019 and 2020.
Earlier this week, the IRS issued Notice 2022-36. This notice officially offers penalty relief to most people and businesses who filed certain 2019 or 2020 returns late. The IRS is going even further by refunding individuals or businesses with automatic payments that are expected to be completed by the end of September 2022.
The IRS is handling this rather quickly to help return to normal operations for the 2023 filing season coming up.
Who does not qualify for the penalty refund?
Although the relief is welcomed news, taxpayers should be aware that this penalty relief does not apply to everyone. Individual taxpayers and small businesses are being given most of this relief money. 1040s and the most common types of 1120s are included within the relief, including returns for S-corporations (1120-S). Also, partnership and estate/trust returns are included within the relief (1065/1041).
For individuals and businesses with foreign holdings, the penalty relief will be quite limited. For example, taxpayers that are noncompliant with international reporting obligations for multiple years. In those cases, the relief would only apply to 2019 and 2020 and only to those returns that are included above.
Relevant forms will not be included with the relief package. For taxpayers with international holdings, Forms 8938 are not included. Other less common forms such as 8865 (Return with Respect to Certain Foreign Partnerships), or 8858 (Information Return with Respect to Foreign Disregarded Entities) are also not included within the scope of the relief.
It is important to note that the relief is explicitly not applicable to returns for which a penalty for fraudulent failure to file has been assessed (under Section 66541(f)), or if the IRS has accepted an Offer in Compromise that includes the late filed penalty. Also, relief is not applicable to penalties settled in a closing agreement (section 7121) or that have been determined or settled in court.
When can I expect my refund if I am qualified?
Although Notice 2022-36 provides that the relief will apply automatically by September 2022, we expect taxpayers to encounter mismatches of information, or penalties not being settled. In those cases, it will be relevant to reach out to the IRS or Tax Network USA to ensure your case is being properly handled.
If you have further questions about this IRS Penalty Refund and/or to see if it applies to you, get in contact with one of our Tax Attorneys at Tax Network USA. We will be able to help you.