Internal Revenue Service Announces Sweeping Penalty Relief for 2019 and 2020 Tax Returns | Fox Rothschild LLP

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The Internal Revenue Service plans to provide broad-based penalty relief for late filing of certain income and information returns for the 2019 and 2020 tax years.

According to Notice 2022-36, this latest penalty relief initiative — which is automatic — is part of the IRS’ ongoing efforts to provide assistance to taxpayers in difficulty due to the COVID-19 pandemic. The IRS also noted that the penalty relief was warranted at this time due to the “unprecedented effect of the pandemic on IRS personnel and operations.”

In total, the IRS expects to refund more than $1.2 billion to about 1.6 million taxpayers by the end of September.

Penalty relief for late-filed tax returns

Notice 2022-36 indicates that the IRS will provide relief from failure to file penalties for 2019 and 2020 tax returns in the Forms 1040 (individual income tax return) and Form 1120 (corporate income tax return) series. companies). This also applies to other types of tax returns, including Form 1065 (partnership filing) and Form 1120-S (corporation filing subchapter S). The penalty for failure to file is generally assessed at a rate of 5% per month, up to 25% of the unpaid tax.

For returns already filed, failure to file penalties will automatically be reduced and, if paid, refunded or credited. For returns that have not yet been filed, those returns must be filed by September 30, 2022 to be eligible for penalty relief. A complete list of all returns eligible for penalty relief can be found in Section 3.A.(1) of the Notice.

Penalty relief for late-filed international information returns

The IRS will also automatically alleviate penalties for late filing of certain foreign information returns for the 2019 and 2020 tax years. The penalty relief applies to the following forms:

  • Form 5471 – U.S. Persons Information Return Regarding Certain Foreign Corporations
  • Form 5472 – Information Statement of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a Trade or Business in the United States
  • Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
  • Form 3520-A – Annual Information Return for Foreign Trusts with a U.S. Owner

Penalty relief for these foreign information returns is particularly important, as the penalties for late filing are substantial. The late filing penalty is $10,000 per form for Form 5471 and $25,000 per form for Form 5472. For Forms 3520 and 3520-A, the late filing penalty is at least $10,000 and may be higher.

For information returns already filed, penalties for failure to file will automatically be mitigated and, if paid, refunded or credited. For information returns that have not yet been filed, those returns must be filed by September 30, 2022 to be eligible for penalty relief.

Relief from penalties for reporting other information

Notice 2022-36 also provides penalty relief for financial institutions, employers, and other businesses required to file certain information returns, including those in the Form 1099 series. information must have been filed no later than August 1, 2020 (for 2019 returns) and no later than August 1, 2021 (for 2020 returns).

Exceptions for Penalty Relief

The penalty relief provided by Notice 2022-36 is not available in certain situations. Penalties will not be mitigated where a fraudulent misrepresentation has been filed, where a court has determined that penalties should be applied, or where penalties are part of an accepted Offer in Compromise or Closing Agreement. Penalty relief also does not apply to the default penalty, but taxpayers can request a reduction of this penalty using existing procedures such as Reasonable Cause or the First Time Abatement program.

Why is the IRS now offering penalty relief?

The general penalty relief provided by the IRS in Notice 2022-26 is highly unusual and reflects the extraordinary and ongoing impact of the COVID-19 pandemic on taxpayers and the IRS. Opinion 2022-36 expressly states that:

The COVID-19 pandemic has also had an unprecedented effect on IRS staff and operations. The agency has been called upon to support emergency relief for taxpayers, such as the distribution of economic impact payments, while maintaining regular operations in a pandemic environment with limited resources, where employees were sometimes not available. able to be physically present to process tax returns and correspondence. In response to these challenges, the IRS has been working hard to process pending returns and taxpayer correspondence to resume 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.

Takeaway meals

This penalty relief provides taxpayers with a unique, time-limited opportunity to avoid penalties for failing to file a wide variety of income tax and information returns. Taxpayers who have already filed their returns do not have to take any action since the relief from the penalty is automatic.

For taxpayers who have yet to file returns for 2019 or 2020, however, time is running out. Eligible returns must be filed by September 30, 2022 to be eligible for penalty relief.

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