IRS relieves penalties for 2019 and 2020

By Paul Bonner

A broad range of tax and information returns for 2019 and 2020 tax years will receive automatic relief from failure-to-file penalties, under Notice 2022-36 released by the IRS Wednesday.

The estimated 1.6 million taxpayers who have already paid these penalties will automatically receive an estimated $1.2 billion in refunds or credits, the IRS said in the notice and announced in a news release. Abatement of the penalties is also automatic.

Taxpayers do not need to request this relief, and the IRS said it will pay most of the refunds or apply credits by the end of next month. However, any return still unfiled for the two tax years must be filed by Sept. 30, 2022, to be eligible for the relief.

Also, the notice abates penalties for failure to timely file any information return (as defined in Sec. 6724(d)(1)), such as those in the Form 1099 series, for the two tax years. To be eligible, information returns for 2019 must have been filed on or before Aug. 3, 2020, and 2020 information returns by Aug. 2, 2021.

In addition, various international information returns such as those reporting transactions with foreign trusts, receipt of foreign gifts, and ownership interests in foreign corporations will receive similar relief. However, to qualify for the relief, any eligible tax return must be filed on or before Sept. 30, 2022.

The relief measure is intended "to help struggling taxpayers affected by the COVID-19 pandemic" and to allow the Service to "focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season," the IRS said in the release.

Another reason for the relief is that additions to tax or penalties for failure to timely file returns continued to accrue during periods of postponed filing dates for returns for both years, under the presidential emergency declaration in March 2020 in response to the pandemic, the IRS acknowledged in the notice.

The AICPA Form 3520 Penalties Task Force had requested penalty relief for Forms 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, especially in light of the backlog, and is pleased the IRS listened and provided some blanket relief, the task force chair, Hank Alden, said Wednesday.

Tax returns eligible for the relief include specified returns in the Form 1040, 1041, and 1120 series. Also eligible are Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e).

In addition, Form 1065, U.S. Return of Partnership Income, and Form 1120-S, U.S. Income Tax Return for an S Corporation, may have penalties forgiven for failure to timely file and for failure to show required information.

The notice also covers certain international information returns, such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, attached only to Forms 1065 and 1120. It does not provide relief for taxpayers filing returns with certain international information returns, e.g., Form 5471, attached to returns other than Forms 1065 and 1120, such as Form 1040 or 1041.

Penalties for fraudulent failure to file under Sec. 6651(f) or the penalty for fraud under Sec. 6663 are not eligible for relief. Any penalties included in an accepted offer in compromise, settled in a closing agreement under Sec. 7121, or finally determined in a judicial proceeding are also ineligible.

The AICPA and other groups and firms have repeatedly advocated that the IRS provide failure-to-file and other penalty relief under procedures similar to those for a first-time abatement administrative waiver but based upon the COVID-19 pandemic as reasonable cause for the failure.

"As the coronavirus is an extraordinary event unlike anything faced in recent history, penalty relief based on a coronavirus effect should not be considered first-time abate," the AICPA said in a May 17, 2021, letter to IRS Commissioner Charles Rettig and Acting Assistant Secretary for Tax Policy Mark Mazur.

In the IRS news release, Rettig acknowledged such input.

"We've been working on this initiative for months following concerns we've heard from taxpayers, the tax community, and others, including Congress," Rettig said.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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