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COVID Tax Relief – IRS Provides Penalty Relief for 2019 & 2020 Tax Filings Due to the Pandemic

By Stephen Stringer, CPA, Director and Amy Sandlin, CPA, Senior Manager

Shortly after the Inflation Reduction Act of 2022 grabbed the headlines out of Washington, the IRS announced a broad-based penalty relief program for individuals, businesses, trusts, and exempt organizations who are late filing certain 2019 and 2020 tax returns. This relief is to help struggling taxpayers affected by the pandemic.

The penalty relief provided in Notice 2022-36 applies to the failure to file penalty – this penalty is assessed for late filed returns and generally calculated at a rate of 5% per month, up to a maximum of 25% of the unpaid tax. However, some of the tax forms eligible for this relief have much higher penalties, such as certain international information forms that have a $10,000 minimum (or higher) penalty.

This relief does not apply to penalties and interest for late or unpaid taxes.

The most common tax returns eligible for penalty relief are individual, trust, partnership, corporation, and S-Corporation income tax returns. The list of forms eligible for relief are listed at the end of this article.

To qualify for this relief, these returns must be filed by September 30, 2022. Late filed returns submitted before this announcement are also eligible for relief.

No additional steps are necessary to be granted the relief, other than filing the applicable return by the September 30th deadline. The penalty relief will be automatic, which means the taxpayer does not have to specifically request relief.

Also, if you have already been assessed a late filing penalty for a 2019 or 2020 tax filing, the penalties will be abated, and you will receive either a credit or refund for this amount.

The IRS estimates that 1.6 million taxpayers will receive automatic penalty relief through this program and taxpayers will receive refunds totaling more than $1.2 billion. As always, if you receive an unexpected refund, you should contact your tax advisor. Do not cash the refund check until you are certain you are entitled to the refund.

The IRS says this relief program will allow the service to focus more resources to process the backlog of tax returns and correspondence as they head into the 2023 filing period. This backlog has led to a slew of late filing and late payment assessments against taxpayers that filed and paid their taxes on time, but the IRS had not yet processed the filings and payments. Unfortunately, this relief does not include automatic penalty abatement for these taxpayers.

If you have not yet filed your 2019 or 2020 income tax returns, the IRS has provided this relief program as an incentive to get the returns filed by abating failure to file penalties. However, time is running out – to qualify you will need to file the applicable return by September 30th, 2022.

We hope this relief is just the beginning of a broad penalty relief package much needed by taxpayers.

In the meantime, please reach out to your Blue & Co., LLC tax advisor if you have any questions about the penalty relief program.

The Relief Applies to the Following Forms:

  • Income Tax Returns:
    • Form 1040 series: U.S. Individual Income Tax Return
    • Form 1041 series: U.S. Income Tax Return for Estates and Trusts
    • Form 1120 series: Corporation Income Tax Return
    • Form 1065: U.S. Return of Partnership Income
    • 1120-S: U.S. Income Tax Return for an S-Corporation
  • Exempt Organization Returns*:
    • Form 990-PF: Return of Private Foundation
    • Form 990-T: Exempt Organization Business Income Tax Return

*Form 990 and 990-EZ are not covered by this penalty relief

  • International Forms:
    • 1120-F: U.S. Income Tax Return of a Foreign Corporation
    • 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 of Foreign Trust With a U.S. Owner
  • 1099 series and similar information returns. Note – these have different deadlines to be eligible, but all of the deadlines are prior to 2022. Therefore, penalty relief is only available if these returns were already filed.

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