Taxpayers – Act Fast if You Want to Benefit from the IRS COVID-Related Penalty Relief

September 8, 2022

At a glance

  • The main takeaway: On August 24, 2022, the IRS announced it will waive failure to file penalties for a vast number of tax returns for the 2019 and 2020 tax years, covering both individual and business returns, including foreign information filings.
  • Impact on your business: Taxpayers who have not yet filed tax returns covered by the relief notice have a very short window to gather their information to get the delinquent returns filed by September 30, 2022. The IRS is waiving only the penalties for failure to file the specified income tax returns and foreign information returns. The relief does not extend to failure to pay penalties, nor does it apply to penalties imposed for underpayment or fraud-related assessments.
  • Next steps: If you have not filed certain listed tax returns for tax years 2019 or 2020, you can obtain relief from penalties if you act fast. Aprio’s Tax Advisors can help you navigate the specifics of this penalty waiver program to determine whether you or your business may benefit from this limited time tax relief.

Schedule a consultation with an Aprio Tax Adviser today.

The full story:

On August 24, 2022, the Internal Revenue Service (IRS) issued Notice 2022-36, which stated its intention to waive failure to file penalties for certain late-filed or unfiled income tax and foreign information returns. The types of returns qualifying for relief can be broken down by form and penalty type, covering several specific groups of tax filings.

The relief covers late filing penalties for the following tax filings where penalties are calculated based on income tax due:

  • Form 1040, U.S. Individual Income Tax series returns
  • U.S. Corporation Income Tax Return series returns
  • Form 1041, U.S. Income Tax Return for Estates and Trusts series returns
  • Form 990-PF, Return of Private Foundation
  • Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return

The Notice also provides waiver of failure to file and failure to report pass-through taxpayer information on partnership and S corporation returns for the following tax filings:

  • Form 1065, U.S. Return of Partnership Income, failure-to-file penalties are calculated at $210 per month, per partner/member, calculated at a maximum of 12 months ($2,420 per partner). These penalties are automatically waived for the 2019 and 2020 tax years if the delinquent return is filed by September 30, 2022.
  • Form 1120-S, U.S. Income Tax Return for an S Corporation, failure-to-file penalties are calculated at $195 per month, per shareholder, calculated at a maximum of 12 months ($2,340 per shareholder), regardless of whether the S corporation had taxable income or loss. These penalties are automatically waived for the 2019 and 2020 tax years if the delinquent return is filed by September 30, 2022.

The Notice also extends failure-to-file penalties for foreign information returns, which also are calculated and imposed regardless of whether the foreign activities generated taxable income or loss. Foreign information returns eligible for penalty waivers under the Notice if filed by September 30, 2022, include:

  • Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
  • Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
  • Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
  • Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner

Finally, some information returns, covered by the penalty provisions of Internal Revenue Code Section 6571, will also receive relief from failure to file penalties. These include Forms W-3, Transmittal of Wage and Tax Statements, 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns and 1095-C, Employer-Provided Health Insurance Offer and Coverage. The latter two forms report employee health coverage and employer responsibilities under the Affordable Care Act (ACA).

How the penalty abatement process will work

Taxpayers who have not filed the tax returns listed as qualifying for penalty waiver relief currently have until September 30, 2022, to send in the delinquent returns. Taxpayer advocacy groups, including the American Institute of Certified Public Accountants (AICPA), have already requested the IRS to extend this filing deadline, given the short notice provided to impacted taxpayers and the fact that this deadline falls within the extended filing deadline window for individual taxpayers. Unless the IRS grants this extension, taxpayers have a brief period in which to compile their information to file delinquent returns.

Taxpayers who previously filed late returns and had penalties assessed for failure to file timely returns will receive refunds automatically from the IRS. No additional action needs to be taken for taxpayers who have previously made payments for penalties covered by the relief. Taxpayers in these situations should be on the lookout for refund checks in the U.S. Mail. Of course, if a taxpayer has an outstanding tax bill, or other federal debt due, the refund will be applied first to those debts, and any remaining amount will be refunded.

The Notice does not provide relief for all tax penalties

While the penalty abatement program announced in Notice 2022-36 provides unprecedented and broad tax relief, the penalty waiver does not cover all situations in which a taxpayer has, or will have, tax penalties assessed. For example, while the Notice waives penalties for late-filed returns, it offers no relief for penalties assessed for reasons other than lateness. Thus, penalties assessed due to incorrect information, understatement of tax, or non-compliance with e-file requirements, will not be waived.

Additionally, the Notice lists other specific penalty scenarios in which the abatement provisions of the relief program will not apply:

  • Penalties included in accepted offers in compromise;
  • Penalties settled in a closing agreement;
  • Penalties finally determined by a court;
  • Fraudulent failure to file penalties;
  • Penalties for underpayments of tax due to fraud and
  • Penalties determined by IRS examination.

The bottom line

Notice 2022-36 creates an unprecedented opportunity for taxpayers who fell behind on their tax filing requirements during the 2019 and/or 2020 tax years to avoid a sizable portion of the penalties generally assessed for late filing of tax returns. However, unless the IRS extends the deadline for filing delinquent returns, taxpayers who may benefit from the relief face a scenario where time is of the essence to obtain this valuable tax penalty forgiveness.

Aprio’s Tax Advisors are closely following the impact and specifics of this new tax penalty relief provision and can help you assess your tax situation to determine whether you or your company can benefit from late filing penalty abatement.

Schedule a consultation with an Aprio Tax Adviser today.

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About the Author

Mitchell Kopelman

Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.

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John Rose, J.D.

Director of Federal Tax Quality Control at Aprio | Tax practice management specialist and conflict resolution and tax research expert