What does the IRS broad-based penalty relief notice do?

The new penalty relief measure applies to both individuals and businesses who faced penalties and will come as welcome news for many. IRS late-filing or failure-to-file penalties are not insignificant, and they can add up. In fact, under IRC § 6651(a)(1), the IRS can calculate such penalties at 5% of the total tax due for each month or partial month the return is late, up to a maximum of 25% of the total. For example, let’s say you owe $10,000. The IRS may apply a penalty of $500 per month, which can accrue up to $2,500 on top of your existing debt.

This notice, however, contains a waiver and abatement of some of these penalties. Moreover, the IRS is also supplying further relief to banks, employers, and other businesses that file various information returns.

It gets even better: Most taxpayers do not have to take any action to benefit from this relief. The IRS will automatically deliver most of the $1.2 billion in refunds to eligible taxpayers next month — no need to apply.

Who qualifies for this Covid-19 tax penalty relief?

Simply put, if you were subject to a late-filing penalty for taxable years 2019 and/or 2020, or if your business was penalized during the corresponding fiscal years, you may be eligible for this provision.

The relief applies to the following types of returns:

  • Federal income tax returns: most Form 1040 and 1120 series returns, Forms 1041, 1065, 1066, 990-T, and 990-PF
  • International information returns (IIRs) attached to the above income tax returns and assessed a penalty at filing: Forms 5471, 5472, 3520, and 3520-A.

There are a couple of important points worth noting. First, if you owe a tax return for 2019 or 2020 and you still haven’t filed it, you must do so before September 30th, 2022, to receive this relief. As long as you file your 2019 and/or 2020 return before that deadline, and provided you are eligible for the relief, you will not be liable for any late-filing penalties for those tax years.

Additionally, filers of information returns other than IIRs for the tax year 2019 filed on or before August 3rd, 2020, will have late-filing penalties abated. However, penalties on information returns that the IRS has assessed for reasons other than lateness will not be waived. For the tax year 2020, the same relief applies for returns filed on or before August 2nd, 2021.

Finally, it is also worth mentioning that there are some exceptions.

What are the exceptions to Notice 2022-36?

The penalty relief described in the notice does not apply to any penalties that are not specifically listed in the notice under section 3.A. Furthermore, you can not expect relief for any penalties for fraud under section 6651(f) or section 6663.

More exceptions include:

  • Penalties settled in a closing agreement;
  • Penalties finally determined by a court;
  • Penalties determined by IRS Examination; or
  • Information penalties that are assessed for reasons other than delinquency, such as incorrect information or non-compliance with e-file requirements.

This provision also does not apply to any penalties in an accepted offer in compromise under section 7122, nor any penalty settled in a closing agreement under section 7121.

How will taxpayers receive the penalty relief?

As mentioned above, the IRS will apply this relief automatically. In fact, they have already begun to do so. Beginning on August 25th, the IRS began providing the relief to eligible taxpayers. They will continue to do so for any qualifying returns filed before September 30th, 2022 — to reiterate, that means if you have not filed for 2019 and/or 2020, you have until that date to do so if you wish to receive penalty relief.

Furthermore, if the IRS has already assessed a penalty, they will abate it, even if they have already previously denied your application for an abatement. If you have already paid a penalty, like 1.6 million other Americans, the IRS will issue you a credit or refund. Generally, they will send this as a paper check, but if you owe other federal debts, it may be applied to those debts first. You will then receive the remainder as a refund, most likely by the end of September.

Two potential issues to note:

  • The IRS will send notices and checks related to this relief program to the last known address they have on file for you. So if you have recently moved and have not yet notified the IRS, don’t wait — update your address now.
  • If you filed jointly in 2019 and/or 2020, the IRS will send refund checks to the current address of the primary individual named on the return — even if you subsequently divorced and filed separately in 2021.

The best and fastest way to find information about your penalty relief is to create an online account with IRS.gov and check your tax transcripts digitally. It may take some time, perhaps up to three months, for the IRS to send out all notices. Therefore, if you have questions, you may want to wait until after November 30th, 2022, before contacting the IRS directly. When the time comes, you can find assistance at (800) 829-1040.

The bottom line

This penalty relief measure is unique in terms of how broad it is, not to mention how favorable it is to the taxpayer. That’s good news for many Americans, but keep in mind that a program this expansive is sure to encounter some bumps along the way.

Just remember — in most situations, no action is required on your part to benefit from this relief. As long as you are eligible, have filed your 2019 and/or 2020 returns, and have updated the IRS on your current address, the best course of action in the near term is simply to be patient.

As always, if you would like some guidance or further information, we are standing by to assist you in any way we can.

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