AICPA asks IRS to expand penalty relief

By Paul Bonner

While the AICPA said it welcomes the IRS's recent grant of automatic penalty relief for failure to file a broad range of tax and information returns for 2019 and 2020, it requested that the IRS expand, modify, and clarify the scope of that relief, as well as extend the relief deadline from Sept. 30 to Dec. 31.

A letter dated Thursday to IRS and Treasury officials including Commissioner Charles Rettig and signed by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee, outlined requested changes that would, among other things, widen the relief to additional penalties, include more types of returns and taxpayer situations, cover more tax years, notify taxpayers who meet the relief criteria, and clarify a number of points of Notice 2022-36, in which the IRS provided the relief on Aug. 24.

In addition, the AICPA, in a letter dated Aug. 30, requested that the Sept. 30, 2022, deadline by which eligible taxpayers may request the relief under the notice be extended to Dec. 31, 2022. The longer period is needed for tax professionals to also meet now-looming filing extended deadlines, the letter stated. Also, "given the complex facts often associated with international information reporting and that many affected taxpayers live abroad," many such taxpayers will be unable to meet the Sept. 30 deadline, the letter said.

In the second letter, the AICPA also requested, besides modifications to the notice, that the IRS issue blanket reasonable-cause relief for the 2019 and 2020 tax years as part of a "penalty relief package" in light of the COVID-19 pandemic — which includes more recent infections by viral variants — and the IRS's acknowledged ongoing challenges in clearing a backlog of returns and taxpayer correspondence.

Widen the administrative scope

Although a recent update to the Internal Revenue Manual (IRM) instructs IRS employees to apply the relief to a failure-to-file penalty on an originally filed return "related to an examination assessment and/or non-filers," the IRS should clarify that the relief applies to penalties assessed at other administrative stages, including appeals and collections. Thus, the letter requested a "blanket reasonable cause relief for all penalties imposed during the 2019 and 2020 tax years."

And, besides originally filed returns, the relief should apply to amended returns filed by the relief deadline and should include all international information returns, the letter stated.

Cover more penalties and returns

The AICPA urged the IRS to expand the relief under Notice 2022-36 to include penalties under the following Code sections: 6038B, 6038D, 6048, 6651 (including 6651(a)(2)), and 6652. It pointed out, with respect to the failure-to-pay penalty, that many taxpayers may have mailed payments, but due to the IRS backlog or postal or bank delays, the IRS failed to process them timely.

Other returns that should be covered but were unmentioned in the notice include Form 990, Return of Organization Exempt From Income Tax, and its abbreviated version for smaller organizations, Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, and several other Form 990-series returns. The letter also requested relief with respect to a number of specified estate, gift, excise, unemployment, and other tax returns, as well as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Expand tax years covered

The AICPA also asked that the relief cover additional tax years, including 2021.

"With the Delta and Omicron variants of COVID-19, many taxpayers continued to experience the harmful effects of the pandemic in 2021 and into 2022," the letter stated. In addition, international information reporting penalties for tax years 2016 through 2018 and 2021 should be covered, "given the IRS general inability to handle reasonable cause requests" for such penalties, including for pre-2019 returns.

Clarify that FTA is still available

The AICPA agreed with a recent blog post by National Taxpayer Advocate Erin Collins that the notice's relief does not supplant first-time abatement (FTA) penalty relief generally available to taxpayers with a record of tax compliance and noted that the IRM update provides procedures consistent with that understanding. However, an updated notice should clarify this to taxpayers, the letter stated. The AICPA also requested that the IRS reinstate any FTA used for 2019 and 2020 returns covered by the notice relief.

Notify eligible taxpayers

IRS managers should direct all employees to contact taxpayers eligible for the automatic relief and/or their authorized representative, the letter stated.

Additional clarifications

The AICPA identified five points of the notice that it said needed clarification, including its application to taxpayers with noncalendar tax years. The IRM update "seems to be applying the Notice also to fiscal years beginning in 2018 if the year ends in 2019," the letter noted. However, the update seems to have inadvertently excluded taxpayers with fiscal years beginning in 2020 but ending in 2021, the letter 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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