On August 24, 2022 the IRS issued Notice 2022-36 which provides failure-to-file penalty relief to many taxpayers who have late filed (or will late file) certain 2019 or 2020 tax returns. Included in this relief are the following income tax returns (not an exhaustive list):
- Form 1040 and 1040-NR Individual Tax Returns
- Form 1041 Tax Returns for Estates and Trusts
- Form 1120 series of Tax Returns for Corporations
- Form 1065 Tax Returns for Partnerships
The relief applies to the “failure to file” penalty which is assessed at a rate of 5% per month, up to 25% of the unpaid tax when a federal income tax return is filed late. Also included in the Notice is penalty relief for various “information” returns such as:
- 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 Return To “Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”
Here, too, IRS will abate penalties for the late filing of these Forms for tax years 2019 and 2020.
This penalty relief is automatic, meaning that a taxpayer need not apply for it. If a penalty has already been assessed, it will be abated, and if a taxpayer already paid a penalty for the failure to file or late filing of a 2019 or 2020 return eligible for penalty relief under the Notice, the taxpayer will receive a credit or refund. The IRS estimates that nearly 1.6 million taxpayers who already paid eligible penalties will receive refunds totalling more than $1.2 billion by the end of September. In IR-2022-155, the IRS explains that “besides providing relief to both individuals and businesses impacted by the pandemic, this step is designed to allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.”
But qualifying for penalty relief under the Notice requires that delinquent returns must be filed by September 30, 2022. The AICPA has written the IRS thanking them for the relief provided under the Notice but states that the September deadline for international information reporting is “unrealistic and will fail to prompt a critical mass of impacted taxpayers to avail themselves of the benefits of the Notice,” and that extending the deadline to the end of the year would “assist the practitioner community in maximizing the relief provided and will bring more taxpayers into voluntary compliance.” The letter states that this would also help the goal of conserving IRS resources.
The AICPA has further requested that penalty relief be expanded as a “blanket reasonable cause relief for all penalties imposed during the 2019 and 2020 tax years,” and that the relief cover specified estate, gift, excise, unemployment, and other tax returns, as well as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
Two further requests were that the relief should apply to amended returns filed by the relief deadline, and apply to additional tax years, including 2021, as these filings remain affected by the COVID pandemic which continues to affect both taxpayers and the IRS. To date, the IRS has not released any updates to Notice 2022-36, meaning that penalty relief applies only to the failure to file the Forms specified in the Notice for tax years 2019 and 2020, and that September 30, 2022 remains the deadline for a late filing to be eligible.
We are working intensely to ensure taxpayers are aware of this opportunity and are able to take advantage of the September 30 filing deadline to avoid the various penalties included in the Notice. We are hoping the IRS listens to the AICPA and provides both an expanded scope and timeframe for this relief.
If you have any concerns, feel free to contact us.