By Matthew D. Lee and Jonathan Wasser

The Internal Revenue Service plans to provide widespread penalty relief for the late filing of certain tax and information returns for the 2019 and 2020 tax years.

According to Notice 2022-36, this latest penalty relief initiative — which is automatic — is part of the IRS’s continuing efforts to provide assistance to taxpayers suffering hardships as a result of the COVID-19 pandemic. The IRS also noted that penalty relief was warranted at this time due to the pandemic’s “unprecedented effect on the IRS’s personnel and operations.”

In all, the IRS expects to refund more than $1.2 billion to approximately 1.6 million taxpayers by the end of September.

Penalty Relief for Late-Filed Income Tax Returns

Notice 2022-36 said the IRS will provide failure-to-file penalty relief for 2019 and 2020 tax returns in both the Form 1040 (personal income tax return) and Form 1120 (corporate tax return) series. It also applies to other types of income tax returns, including Form 1065 (partnership return) and Form 1120-S (subchapter S corporation return). The failure-to-file penalty is generally assessed at a rate of 5% per month, up to 25% of the unpaid tax.

For returns already filed, failure-to-file penalties will be automatically abated and, if paid, refunded or credited. For returns not yet filed, such returns must be filed by Sept. 30, 2022, to qualify for penalty relief. A full list of all returns eligible for penalty relief can be found in Section 3.A.(1) of the notice.

Penalty Relief for Late-Filed International Information Returns

The IRS will also automatically abate penalties for the late filing of certain foreign information returns for the 2019 and 2020 tax years. Penalty relief applies to the following forms:

  • 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 to Foreign Trusts with a U.S. Owner

Penalty relief for these foreign information returns is particularly significant, as the penalties for late filing are substantial. The late-filing penalty is $10,000 per form for Form 5471 and $25,000 per form for Form 5472. For Forms 3520 and 3520-A, the late-filing penalty is at least $10,000 and can be higher.

For information returns already filed, failure-to-file penalties will be automatically abated and, if paid, refunded or credited. For information returns not yet filed, such returns must be filed by Sept. 30, 2022, to qualify for penalty relief.

Penalty Relief for Other Information Returns

Notice 2022-36 also provides penalty relief for financial institutions, employers and other businesses required to file certain information returns, including those in the Form 1099 series. To be eligible for relief, the information returns must have been filed by August 1, 2020 (for 2019 returns) and by August 1, 2021 (for 2020 returns).

Exceptions for Penalty Relief

The penalty relief offered by Notice 2022-36 is not available in certain situations. Penalties will not be abated where a fraudulent return has been filed, where a court determined penalties should be applied or where penalties are part of an accepted offer-in-compromise or closing agreement. Penalty relief also does not apply to the failure-to-pay penalty, but taxpayers may seek to have such penalty abated using existing procedures such as reasonable cause or the First Time Abatement program.

Why Is the IRS Offering Penalty Relief Now?

The broad-based penalty relief provided by the IRS in Notice 2022-26 is highly unusual and reflects the extraordinary and continuing impact of the COVID-19 pandemic on taxpayers and the IRS. Notice 2022-36 expressly notes that:

The COVID-19 pandemic has also had an unprecedented effect on the IRS’s personnel and operations. The agency was called upon to support emergency relief for taxpayers, such as distributing economic impact payments, while sustaining its regular operations in a pandemic environment with limited resources, where employees were sometimes unable to be physically present to process tax returns and correspondence. In response to these challenges, the IRS has been working aggressively to process backlogged returns and taxpayer correspondence to return to normal operations for the 2023 filing season. The Treasury Department and the IRS have determined that the penalty relief described in this notice will allow the IRS to focus its resources more effectively, as well as provide relief to taxpayers affected by the COVID-19 pandemic.

The Takeaway

This penalty relief presents a unique, limited-time opportunity for taxpayers to avoid failure-to-file penalties for a wide variety of tax and information returns. Taxpayers who have already filed their returns need not take any action since the penalty relief is automatic.

For taxpayers who have not yet filed returns for 2019 or 2020, however, time is of the essence. Qualifying returns must be filed by September 30, 2022, in order to be eligible for penalty relief.