IRS Issues Important and Timely COVID Pandemic-Related Penalty Relief

By: Tiffany D. Bell, Esq.

Businesses and individuals will receive automatic penalty relief for failure to file certain tax returns and international information returns for the 2019 and 2020 tax years.  IRS issued Notice 2022-36 on August 24, 2022, notifying taxpayers that the specified penalties will be waived, or if previously assessed, abated, refunded or credited.

IRS announced the penalty relief, acknowledging the adverse effects the COVID pandemic has had on taxpayers and on its own return processing functions.  IRS explains that this automatic relief will allow its employees to focus resources on processing the still-backlogged tax returns and correspondence.  The goal is to avoid the immense volume of penalty disputes currently pending before IRS and so that resources may be focused on resuming normal business operations sooner and preparing for the 2023 tax filing season.

It has been no secret to taxpayers or tax practitioners that IRS has been overburdened and overwhelmed since the pandemic caused a shutdown in most IRS operations in early 2020.  Since then, IRS has been slow or entirely nonresponsive to taxpayers’ and tax practitioners’ inquiries.  By 2022, the Service still had millions of backlogged unprocessed returns it was struggling to process.  Then,  in May, 2022, the Treasury Inspector General for Tax Administration (TIGTA) shocked practitioners and taxpayers when it reported that the IRS destroyed 30 million “paper-filed information return documents.”   The revelation was a particular surprise to taxpayers who filed those returns but were facing IRS penalties for failure to file them.  Indeed, it is very difficult for IRS to make determinations for failure to file or accuracy related penalties on tax returns when it knows that it destroyed 30 million documents without processing them.

The Service’s goal of getting caught up, should now be easier with the announcement and application of Notice 2022-36.  The Notice provides automatic penalty relief to certain businesses and individuals who are either subject to or have been assessed failure to file penalties, including Forms 1040 and the 1120 series.  In order to qualify for this relief, any eligible income tax returns must be filed on or before September 30, 2022.  IRS is also providing penalty relief to banks, employers and other businesses required to file information returns, such as 1099s. To qualify for this relief, the eligible returns for 2019 must have been filed by August 1, 2020 (or August 3, 2020- the Monday following the deadline) and for eligible returns for 2020 must have been filed by August 1, 2021 (or August 2, 2021- the Monday following the deadline).

Notice 2022-36 also includes details regarding additional penalty relief for filers of various international information returns for tax years 2019 and 2020. The penalty relief applies to, inter alia, Forms 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations); Forms 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business); Forms 3520 (Annual Return to Report Transactions With Foreign Trust and Receipt of Certain Foreign Gifts); and Forms 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner).   To qualify for this relief, the returns must be filed on or before September 30, 2022.

The penalties will be automatically abated, refunded or credited without any need for the taxpayers to request the relief.  Taxpayers and practitioners should, however, monitor any pending matters to ensure that IRS does not proceed with determinations, assessments or collection actions contrary to the assurances set forth in the Notice.  The penalty relief described in Notice 2022-36 does not apply to any penalties that are not specifically listed in the Notice.  It will also not apply to any penalty for fraudulent failure to file or fraud penalties.

Andreozzi Bluestein has extensive experience representing individuals and businesses seeking penalty abatement.  If the IRS has asserted or assessed penalties against you, or has not automatically abated penalties subject to Notice 2022-36 and you would like to discuss your options with us, please call today for a no obligation consultation.

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