IRS Offers $1.2B In Penalty Relief; Tardy Taxpayers Must Act Quickly

WASHINGTON, DC — Here’s a deadline taxpayers tardy in filing their refunds because of COVID-19 shouldn’t miss: Sept. 30.

About 1.6 million dilatory taxpayers can collectively claim about $1.2 billion in penalty relief if they file overdue 2019 or 2020 tax returns by that date, according to the Internal Revenue Service.

“Throughout the pandemic, the IRS has worked hard to support the nation and provide relief to people in many different ways,” IRS Commissioner Chuck Rettig said in an Aug. 24 news release announcing the penalty relief program.

Additionally, the IRS is issuing refunds to taxpayers who paid the penalties when filing late returns. People and businesses in this group don’t need to do anything. The agency said the checks will be automatically paid out, with most completed by the end of September.

Most eligible taxpayers will get a check mailed to the address on file with the IRS, according to the Taxpayer Advocate Service blog on the agency’s website.

Here’s what you need to know:

• The relief is applied to the failure-to-file penalty, typically assessed at a rate of 5 percent per month, up to 25 percent of the unpaid tax when a federal return is filed late. That means someone who owed $10,000 in back taxes would owe $500 a month, up to a cap of $2,500.

• The penalty forgiveness applies primarily to late filers of both Form 1040 for individuals and the 1120 series for corporations. A complete list of eligible filers is found on Notice 2022-36 found on the IRS website.

• The relief program does not apply in cases where penalties were assessed due to fraud, incorporated in an accepted compromise offer, IRS closing agreement, or a court order. More information can be found on Notice 2022-36.

• Eligible taxpayers who haven’t filed their returns for 2019, 2020 or both years must do so by Sept. 30 to qualify for the penalty relief.

• The best way to check the status of an expected penalty refund (or any return filed with the IRS) is to create an online account on the IRS website.

• Taxpayers who have moved since filing their last return should “lose no time” updating their addresses with the IRS, according to the Taxpayer Advocate Service blog. To do that, taxpayers must call the IRS or complete a mail-in form. It can take the IRS up to six weeks to fully process a change of address. It may be quicker for taxpayers to update their addresses online with the U.S. Postal Service, but the update with the IRS is still important because not all post offices forward government checks.

Banks, employers and other businesses that are required to file information returns, such as those in the 1099 series, are also eligible for relief. So, too, are filers of international information returns, including those reporting transactions with foreign trusts, receipt of foreign gifts and ownership interests in foreign corporations. To qualify, those returns also must be filed on or before Sept. 30.

The IRS said the penalty relief program will allow its staff to prioritize a backlog of unprocessed returns. An estimated 19 million Americans asked for extensions until Oct. 17 to file their 2021 tax returns, according to the IRS. The agency said that as of Aug. 26, an estimated 8.2 million individual returns, including 6.5 million paper filings, had not yet been processed.

“Penalty relief is a complex issue for the IRS to administer,” Rettig said in the news release. “We’ve been working on this initiative for months following concerns we’ve heard from taxpayers, the tax community and others, including Congress.”