IRS: Partial Penalty Relief Still Available for 2019 and 2020 Returns, But it Depends…

Amidst the upheaval of the COVID-19 pandemic, some U.S. taxpayers were unable to file their 2019 or 2020 income tax returns within the IRS’ filing deadlines The Internal Revenue Service, in a show of understanding, fully waived penalties for individual taxpayers and businesses who filed certain late returns by September 30, 2022. Although the deadline has recently passed  — and the IRS is not extending it — taxpayers who file late 2019 or 2020 returns may nonetheless be eligible for partial penalty relief, according to the IRS. According to the IRS, the agency will calculate failure to file penalties based on an October 1st start date, not the date that a taxpayer’s returns were originally due. This means that taxpayers who missed the September 30th should nonetheless file their delinquent returns as early as possible. 

IRS Extends Provisional Grace

On August 24, the IRS announced that it would provide automatic, broad-based penalty relief for taxpayers filing several different kinds of tax and information returns, including Form 1040, U.S. Individual Income Tax Return; Form 1041, U.S. Income Tax Return for Estates and Trusts; and Form 1120, U.S. Corporation Income Tax Return (Notice 2022-36).

The relief also applies to taxpayers filing certain international information returns, including

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 (Under section 6048(b)).

The IRS’ relief exempts eligible taxpayers from paying a failure-to-file penalty, which is a 5 percent penalty applied monthly, up to 25 percent of the unpaid tax when a federal income tax return is filed late, according to the IRS.

Importantly, the relief did not apply to situations where a fraudulent return was filed, or where the penalties were part of an accepted offer in compromise, a closing agreement, or were finally determined by a court.

Since the relief is automatic, taxpayers simply had to file their late 2019 or 2020 income tax returns on or before September 30, 2022. Taxpayers who had already paid their penalties received those back in the form of refunds or credits.

Tax Industry Seeks Penalty Forgiveness Extensions

After the IRS made its announcement, some lawmakers and accounting industry stakeholders asked the IRS to extend its deadline.

A group of Republican lawmakers wrote the IRS and requested an extension until mid-to-late November, noting that the five week period between August 24 and September 30 might be insufficient for taxpayers who need to gather information and supporting documents.

The American Institute of CPAs (AICPA) asked the IRS to extend the deadline to December 31, 2022, due to concerns that the timeline would overburden practitioners and might be too short for taxpayers living abroad.

“Given the complex facts often associated with international information reporting and that many affected taxpayers live abroad, the September 30 deadline is unrealistic and will fail to prompt a critical mass of impacted taxpayers to avail themselves of the benefits of the Notice,” said the AICPA.

The AICPA followed up with another letter asking the IRS to extend penalty relief to several international forms, including Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests; Form 8938, Statement of Foreign Financial Assets; and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

Partial Penalty Relief Still Available

The IRS declined to extend the filing period or expand relief to the forms listed by the AICPA. In a statement, IRS Commissioner Chuck Rettig said the IRS understood the concerns of taxpayers and practitioners, but needed to keep the September 30 deadline so it can prepare for the upcoming 2023 tax filing season.

However, taxpayers who missed the September 30 deadline may still receive partial penalty relief for the returns listed in Notice 2022-36. In the same statement, the IRS explained that taxpayers who file for the first few months after September 30 will be eligible for partial relief.  

According to the IRS, failure to file penalties for eligible returns filed after the deadline will start accruing on October 1, 2022, not the return’s original due date. However, failure to pay penalties and interest will accrue based on the return’s original due date.

Post Sep 30, 2022 Options

Taxpayers who missed the September 30 filing deadline for returns covered by Notice 2022-36 should immediately engage the help of a trusted tax advisor to file their returns as quickly as possible and take advantage of the IRS’ partial penalty relief. For taxpayers whose returns are not listed in the IRS’ notice, options for penalty relief may be more limited; counsel from a tax professional will be necessary to determine the proper course of action.