The Internal Revenue Service (IRS) recently issued a notice providing penalty relief to individuals and businesses who file certain 2019 or 2020 tax returns late amid the COVID-19 pandemic. While the penalty relief is welcomed by individuals and businesses alike, it also allows the IRS to focus its efforts on processing backlogged tax returns and taxpayer correspondence, setting it up for the 2023 filing season.  

Relief for Individuals

The failure to file penalty is typically assessed at a rate of 5% per month, up to 25% of the unpaid tax when a federal income tax return is filed late. The recently announced relief applies to forms in the Form 1040 and Form 1120 series, as well as additional forms listed in Notice 2022-36. If an eligible income tax return is filed by Sept. 30, 2022, individuals will qualify for the relief; there’s no need to apply for it or to contact the IRS.  

Additionally, the IRS is taking the relief a step further by providing refunds or credits to those who have already paid failure to file penalties. As a result, over 1.6 million taxpayers will automatically receive nearly $1.2 billion in refunds or credits by the end of September. 

It’s important to note there are certain situations where penalty relief is not available, including situations where a fraudulent return was filed, if penalties are part of an accepted offer in compromise or a closing agreement, or if penalties were ordered by a court.  

Relief for Businesses

The IRS is also extending penalty relief to employers, banks and other businesses required to file information returns, including those in the Form 1099 series. To qualify for the relief, eligible 2019 returns must have been filed by Aug. 1, 2020, and eligible 2020 returns must have been filed by Aug. 1, 2021. Since both deadlines fell on a weekend, a 2019 return will still be considered timely for relief purposes if it was filed by Aug. 3, 2020, and a 2020 return by Aug. 2, 2021. The notice provides further details on the eligible information returns.  

The notice also offers insight on relief for filers of various international information returns, such as those who received foreign gifts, reported transactions with foreign trusts or had ownership interests in foreign corporations. If an eligible tax return is filed by Sept. 30, 2022, the relief will automatically be applied.  

Wondering if you or your business qualify for the failure to file penalty relief? Contact Doeren Mayhew’s business tax accountants and individual tax CPAs today for assistance.