To help struggling taxpayers affected by the COVID-19 pandemic, the Internal Revenue Service today issued Notice 2022-36, which provides penalty relief to most people and businesses who file certain 2019 or 2020 returns late.
The relief applies to the failure to file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. This relief applies to forms in both the Form 1040 and 1120 series, as well as others listed in Notice 2022-36, posted today on IRS.gov.
To qualify for this relief, any eligible income tax return must be filed on or before September 30, 2022.
In addition, the IRS is 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 1, 2020, and eligible 2020 returns must have been filed by August 1, 2021.
Do taxpayers have to file refund claims to get back penalties? No. Per the IRS:
Penalty relief is automatic. This means that eligible taxpayers need not apply for it. If already assessed, penalties will be abated. If already 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 $1.2 billion. Most eligible taxpayers will receive their refunds by the end of September.
This relief is limited to the penalties that the notice specifically states are eligible for relief. Other penalties, such as the failure to pay penalty, are not eligible.
Tax pros have been calling for this sort of relief since March of 2020. As noted in the articles linked below, it may have as much to do with IRS processing backlogs as with struggling taxpayers.
Tax Community Cheers IRS’s Broad Grant of Penalty Relief - Jonathan Curry, Tax Notes ($):
In a stunning about-face, the IRS announced a broad array of penalty relief for tax years 2019 and 2020, including over $1.2 billion in refunds to be automatically issued to taxpayers who already made penalty payments.
The penalty relief comes as the IRS has been swamped by an immense paper backlog. Despite emergency actions by the agency and [IRS Commissioner] Rettig’s assurances that it would have the backlog down to a manageable level by the end of the year, early indications are that the IRS isn’t on track to meet that goal. More recently, lawmakers wrote to the IRS chief to express concern about the IRS’s progress in tackling the backlog. The IRS has yet to respond to the lawmakers’ request for an update.
Robert Kerr of Kerr Consulting LLC observed that while the penalty relief should help the IRS, there’s still a lot of mail that will need to be opened and considered to determine if it can be discarded. “The IRS is still up to its eyeballs in paper forms and returns. How is the IRS going to know which one of those pieces of paper in a cafeteria in Austin is something it can just disregard?” he wondered.
The notice doesn't provide any replacement for the sleep lost meeting deadlines that turn out to have not mattered. Nor does it return to taxpayers and practitioners the time and effort spent responding to notices that no longer matter, and that wouldn't have been issued if the penalty waivers had been given back in 2020.
Good News: The IRS Is Automatically Providing Late Filing Penalty Relief for Both 2019 and 2020 Tax Returns. Taxpayers Do Not Need to Do Anything to Receive this Administrative Relief. - Erin Collins, NTA Blog:
The IRS’s penalty relief program commences on August 25, 2022, and automatically provides late-filing penalty relief without the need for taxpayers to request the relief and will continue to be applied to returns received through September 30, 2022. Notices and refunds are being initiated now and many of the refunds will be completed by the end of September. Certain penalties abated manually, such as those associated with the late filing of Forms 3520 and 3520-A, will take somewhat longer to process.
If penalties have been assessed, they will be removed, and if a request for abatement was denied, it will now be automatically granted. If the abatement or removal of penalties generates a refund, it will first be applied to any outstanding liabilities and the balance will be paid by check and mailed to taxpayers’ current address in the IRS’s system. There is no option for direct deposit or debit card. In very rare circumstances, a small percentage of taxpayers will receive their refund via direct deposit, but the overwhelming majority of refunds will be distributed via check.
First Time Abatement and reasonable cause not impacted. This unprecedented program is conceptualized as broad administrative penalty relief and is designed specifically to meet the exigent circumstances of the pandemic. The relief does not fall into the category of either the First Time Abatement (FTA) or reasonable cause relief. FTA is an administrative waiver that provides otherwise-compliant taxpayers relief from penalties if certain criteria are met. The policy behind FTA is to reward taxpayers for having a clean compliance history, while recognizing that taxpayers occasionally make a mistake...
The current penalty relief program will neither preclude taxpayers from receiving FTA for the next three years nor require justification, as would be the case with a request for reasonable cause.
IRS Waives $1.2 Billion in Late-Filing Penalties for Income-Tax Returns - Ashlea Ebeling, Wall Street Journal:
Tax preparers said the decision was a rare step from the agency. It has traditionally kept deadlines in place and even extended the two years’ tax-filing deadlines. In the end, the IRS said Covid-19 pandemic struggles, both for taxpayers and the agency, were the reason for the decision.
The penalty relief doesn’t extend to this year’s tax filing season. Tax returns and payments for tax year 2021 were due April 18, 2022, for most taxpayers; returns for those who requested an extension are due Oct. 17. This year, the IRS says, 19 million individual taxpayers have requested an extension.
IRS Grants Pandemic Penalty Relief On 2019, 2020 Late Filings - Theresa Schliep, Law360 Tax Authority ($). "The U.S. Department of the Treasury 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," the notice said."
Late Filing Penalty Relief for 2019 and 2020 Returns to Generate Automatic Refunds - Christine Speidel, Procedurally Taxing. "Returns must be filed by September 30, 2022 to qualify for relief."
If You Haven’t Filed Your 2019 and/or 2020 Tax Returns, You Have One Month to Do So and Avoid Late Filing Penalties - Russ Fox, Taxable Talk. "Let’s say you haven’t filed your 2020 tax return. You’re being given a golden opportunity to avoid a 25% penalty."
IRS refunding $1.2 billion to millions who faced COVID-related late-filing tax penalties - Kay Bell, Don't Mess With Taxes. "Again, note the automatic designation. Eligible taxpayers don't need apply for it or, as the agency's commissioner specifically notes in the announcement, call the IRS to get the penalty relief."
IRS Announces Broad Penalty Relief for Specified 2019 and 2020 Tax and Information Returns - Ed Zollars, Current Federal Tax Developments. "While the Notice discussed COVID-19 related issues in general, the background concludes with what is likely the most significant factor driving this relief—the fact that, due to the backlog of unprocessed documents and returns, this is being done to hopefully clear out a lot of issues the IRS otherwise has to deal with before the agency could get back to pre-pandemic processing and response times."
The 2022 Global Penalty Relief | Notice 2022-36 | Who qualifies and who does not? Relevant Implications for taxpayers with international assets/accounts - Fernando Jauarez, Freeman Law. "However, the benefits for individuals and businesses with foreign holdings are quite limited. For example, taxpayers that are noncompliant with international reporting obligations for multiple years. In those cases, the relief would only apply to 2019 and 2020 and only to those returns that are included above. In these particular cases, other options are a safer route, such as the Streamlined Offshore Procedures, which reduces exposure for multiple years and forms not included in the relief."
Biden Says Tax-Free Student Debt Relief Plan Will Help Millions - Alexander Rifaat, Tax Notes ($):
Individuals who earn less than $125,000 per year and married couples with combined earnings of less than $250,000 will be eligible for the relief.
Under provisions stipulated in the American Rescue Plan Act of 2021, the debt cancellation will not be treated as taxable income at the federal level.
What $10,000 in student loan forgiveness means for your tax bill - Kaitlyn Koterbski, Fortune. "As President Joe Biden announces the historic step that borrowers with federal student loan debt will have $10,000 wiped away from their balances, recipients of the loan forgiveness will not have to worry about paying federal income tax, thanks to a provision in the American Rescue Plan (ARP) of 2021."
Inconsistent Tax Treatment of Student Loan Debt Forgiveness Creates Confusion - Garrett Watson and William McBride, Tax Policy Blog. "As it stands, it appears that most borrowers will be exempt from federal tax on this round of debt forgiveness. However, as our colleague Jared Walczak has pointed out, the discharged debt is likely subject to state income tax in several states."
Calif. Lawmakers OK Tax Breaks For Conservation Rebates - Zak Kostro, Law360 Tax Authority:
California would exclude from taxable income financial incentives received in connection with a turf replacement water conservation program under a bill unanimously approved by state lawmakers and headed to Democratic Gov. Gavin Newsom.
A.B. 2142, which passed the Senate by a 40-0 vote Tuesday after having cleared the Assembly in May, would exclude from personal and corporate taxable income any rebate, voucher or other financial incentive received for participation in a turf replacement water conservation program, according to a Senate floor analysis. The exclusion would be allowed for the 2022 through 2027 taxable years, according to the analysis.
Idaho Governor Calls Special Session to Consider Flat Income Tax - Paul Jones, Tax Notes ($). "The special session, set for September 1, will focus solely on RS29902, which would authorize $500 million for the tax rebates, create a flat 5.8 percent individual income tax rate, reduce the current 6 percent corporate tax rate to 5.8 percent, and allocate $410 million to the state’s education system, to be increased by 3 percent annually thereafter."
Texas Court Rules Against Conagra in Apportionment Dispute - Andrea Muse, Tax Notes ($). "A Texas appellate court concluded that Conagra Brands Inc. could include only the net proceeds, and not the gross proceeds, from the sales of commodity futures contracts in its apportionment formula."
IRS to Start Spending Its $80 Billion Budget by Hiring People to Answer the Phone - Richard Rubin, Wall Street Journal:
Enforcement is the main goal of the Biden administration’s plan for the IRS, and that is reflected in how the money is divided in the 10-year plan, with $45.6 billion going to enforcement, $25.3 billion to back-office operations and just $3.2 billion for taxpayer services.
Enforcement hiring will take much longer than adding people to phone lines. First, [Treasury official Natasha] Sarin said, the IRS will expand and update its human-resources office to handle the higher volume of hiring. Then, it will start recruiting people with specialized knowledge who can audit large partnerships or corporations.
IRS has $80 billion coming. It should be spent on answering the phone. - Michelle Singletary, Washington Post. "During the most recent filing season, the agency received about 73 million telephone calls from taxpayers seeking help or guidance. A mere 10 percent of those calls reached an IRS employee, Erin Collins, the national taxpayer advocate, said in her midyear report to Congress."
IRS Continues to Work Toward Accessibility for All Taxpayers - Kelly Phillips Erb, Bloomberg. "That’s what visually impaired taxpayers alleged was happening in a lawsuit filed against the US Treasury in 2019. In their complaint, three taxpayers and the National Federation of the Blind Inc. charged that the IRS was sending notices and letters in a format that was not readily accessible to most blind people."
Three Tax Mistakes You Might Make Daily - Robert Wood, Forbes. "Keep good records"
Foreign Loans & Mortgages – Foreigners Residing in US / Expats Returning to US…. Surprise! US Withholding Tax Required on Interest Payments? - Virginia La Torre Jeker, Virginia - US Tax Talk. "Often, in multi-national families, a foreign parent or relative will make a loan to a family member and require that interest be paid on the loan. In some cases, the debtor will be residing overseas. In other cases, he will be living in the US. As we will see, the debtor’s connection to the US can cause some headaches with regard to the interest payments."
Who Will Win The Battle Over Framing The Inflation Reduction Act? - Howard Gleckman, TaxVox:
Democrats remember the disastrous electoral consequences when they failed to promote the 2010 Affordable Care Act (ACA). Republicans won control of Congress that year in part by battering the law’s non-existent “death panels.”
And Republicans remember how Democrats convinced the public that the 2017 Tax Cuts and Jobs Act (TCJA) benefited only the rich, when in fact it cut taxes for almost everyone. The GOP let that happen in part because President Trump never bothered to promote the TCJA after it became law.
US-Canada Citizen's Estate Loses Challenge To FBAR Penalty - Parker Quinlan, Law360 Tax Authority:
The accounts date back nearly six decades to when Jones' husband began placing funds in them, around the end of World War II. By the time the IRS caught up, they held millions across 11 accounts, according to Tuesday's ruling.
Jones knew about the accounts but never told her tax preparer, the government said, indicating that she was willfully attempting to hide the assets. It therefore assessed a penalty even after she admitted to the existence of the accounts.
Founder of Yoga to the People and Two Other Former Executives Charged With Tax Fraud - Joseph Pisani, Wall Street Journal.
The complaint alleges that Yoga to the People, a chain of studios founded by Mr. Gumucio in New York in 2006, brought in more than $20 million between 2010 and 2020, but the company never filed a corporate tax return with the Internal Revenue Service. In addition, the three former executives didn’t file personal tax returns between 2013 and 2020, according to the complaint.
The government alleges that Yoga to the People didn’t keep financial records, paid workers in cash and didn’t give them the required tax forms.
So many mistakes. If you have receipts of $20 million, somewhere in there something is getting reported to the IRS, and they will be looking for a return. And when you pay employees in cash without withholding, every new hire is a potential informant. Other than that, a foolproof plan.
Not necessarily appropriate in office settings. Today is Kiss and Make Up Day. "The holiday was created by a woman named Jacqueline Milton to re-examine old relationships and find ways to repair them." If that doesn't work out, though, today is also National Whiskey Sour Day and National Banana Split Day.