IRS grants failure to file penalty relief for 2019 and 2020 returns

by | Aug 25, 2022

TAX ALERT | August 25, 2022

Executive Summary

The IRS released Notice 2022-36 providing relief for certain taxpayers from certain failure to file penalties and certain international information return penalties for 2019 and 2020 tax returns filed on or before Sept. 30, 2022. In addition, the Notice provides penalty relief for certain domestic information return penalties for 2019 returns that were filed on or before Aug. 1, 2020, and 2020 returns that were filed on or before Aug. 1, 2021. The IRS will automatically waive, or to the extent previously assessed, abate, refund, or credit, the penalties. According to the notice, this penalty relief is, in part, a result of the unprecedented effect of the COVID-19 pandemic on IRS personnel and operations and the resulting backlog of returns and taxpayer correspondence. The automatic waiver and abatement of the penalties identified in the Notice will allow the IRS to focus its resources more effectively, as well as provide relief to taxpayers affected by the pandemic. 

Automatic Waiver, Abatement, Refund or Credit for Penalties for Failure to File Certain Income Tax Returns and International Information Returns if filed by Sept. 30, 2022

The Internal Revenue Code imposes penalties for failing to timely file certain income tax returns as well as domestic or international information returns. Typically, penalties under these provisions do not apply if the taxpayer can establish reasonable cause for the late filing. However, Notice 2022-36 provides for automatic relief from these penalties without any requirement to show that the taxpayer had reasonable cause for filing late. Moreover, if the relief applies, the IRS will waive, abate, refund or credit, as appropriate without the taxpayer having to make a request for relief. This relief applies only to failure to file penalties and not failure to pay penalties. 

Income tax returns

The notice provides that penalties for failure to file the following income tax returns for taxable years 2019 and 2020 will be automatically waived or abated, refunded, or credited, provided that the returns are filed on or before Sept. 30, 2022:

  • Form 1040, U.S. Individual Income Tax Return, Form 1040-C, U.S. Departing Alien Income Tax Return; Form 1040-NR, U.S. Nonresident Alien Income Tax Return; Form 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents; Form 1040 (PR), Federal Self-Employment Contribution Statement for Residents of Puerto Rico; Form 1040-SR, U.S. Tax Return for Seniors; and Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico);
  • Form 1041, U.S. Income Tax Return for Estates and Trusts; Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts; and Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts;
  • Form 1120, U.S. Corporation Income Tax Return; Form 1120-C, U.S. Income Tax Return for Cooperative Associations; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation; Form 1120-H, U.S. Income Tax Return for Homeowners Associations; Form 1120-L, U.S. Life Insurance Company Income Tax Return; Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons; Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations; Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts; Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies; and Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B );
  • Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; and
  • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)). Note: The relief does not extend to Form 990, Return of Organization Exempt From Income Tax

International Information returns

The notice also provides for automatic waiver or abatement of penalties for failing to timely file the following international information returns for the 2019 and 2020 taxable years when filed on or before Sept. 30, 2022:

  • Form 5471, Information Return of U.S. Person 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, and 
  • Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b))

Partnership and S Corporation Returns

The notice expands the relief in the case of Form 1065, U.S. Return of Partnership Income and Form 1120-S, U.S. Income tax Return for an S Corporation. With these forms, the penalty relief extends to both failure to file and failure to show the required information under Section 6698(a) and Section 6699(a), respectively. 

Additional Relief for Domestic Information Return Penalties for Tax Years 2019 and 2020

In addition, the notice provides that the IRS will not impose penalties under Section 6721(a)(2)(A) (failing to file domestic information return) with respect to any information return defined in Section 6724(d)(1), as long as the domestic information return meets the following criteria:    

  • Tax year 2019 returns that were filed on or before Aug. 1, 2020 (with original due dates of Jan. 31, 2020; Feb. 28, 2020 (paper filed) or March 31, 2020 (electronically filed); or March 15, 2020; or
  • Tax year 2020 returns that were filed on or before Aug. 1, 2021 (with original due dates of Jan. 31, 2021; Feb. 28, 2021 (paper filed) or March 31, 2021 (electronically filed); or March 15, 2021

Taxpayers should note that the relief provided in the notice does not apply to any penalties not specifically identified in the notice or where the failure to file is due to fraud. Finally, the relief does not apply to any penalties that have already been resolved by the IRS and the taxpayer in an offer in compromise under Section 7122, a closing agreement under Section 7121 or a judicial proceeding. 

Key Takeaways 

Taxpayers who may qualify for penalty relief under Notice 2022-36 should ensure that any outstanding tax returns and corresponding international information returns for 2019 and 2020 are filed with the IRS on or before Sept. 30, 2022. Taxpayers who may have been subject to penalty should review their IRS records to ensure they receive automatic relief.  

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This article was written by Alina Solodchikova, Evan Stone and originally appeared on 2022-08-25.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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