Today, the IRS issued Notice 2022-36, which will abate the late filing penalties for many tax returns and forms as they relate to tax years 2019 & 2020. Notice 2022-36 provides a relief for individual tax returns for 2019 and 2020. The IRS will fully waive late filing penalties for taxpayers who qualify for relief. And, if the taxpayer paid a late filing penalty, the IRS will issue a refund.
To fully understand the scope of the relief, you should note that only returns for 2019 and 2020 are eligible for the late filing penalties abatement relief. Second, the taxpayer must file the return or informational form no later than September 30, 2022. In other words, if the taxpayer didn’t file the corresponding tax returns for 2019 and 2020, they have until September 30, 2022, to file those returns and be entitled to relief.
Third, the following forms qualify for relief:
|Series/Type of return||Tax Form||Type of penalty abated|
|1040, Individual Tax Returns||1040, 1040-NR, 1040 (PR), 1040-SR, 1040-SS||Failure to File (FTF)|
|1041, Tax Returns for Estates and Trusts||1041, 1041-N||FTF|
|1120, Tax Returns for Corporations||1120, 1120-C, 1120-S, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF||FTF|
|Return for Real Estate Mortgage Investment Conduit||1066|
|Return for Private Foundations/ Exempt Organizations||990-PF, 990-T|
|Information Return Of U.S. Persons Concerning Certain Foreign Corporations||5471||FTF – USD 10,000 per form not filed|
|Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business||5472||FTF – USD 25,000 per form not filed|
|Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts||3520/3520-A||FTF – For foreign trusts, the penalty amounts to 35% of the value of trust/property transferred to the trust.|
For foreign gifts, 5% of gift value up to a maximum of 25% penalty
|Tax Return for Partnerships||1065||FTF|
|Information returns||1099 (all types) 1042, W-2||FTF. In this particular case, the information return must have an original due date of January 31, 2020, February 28, 2020, or March 31, 2020 (For 2019) and the same periods for 2021 (for 2020)|
While the relief is welcome news, taxpayers should know that the relief is limited in scope. Nevertheless, some taxpayers and small businesses are big winners from this relief. The relief provided by Notice 2022-36 covers form 1040 and the most common 1120 types, including declarations for S-corporations (1120-S). In addition, Notice 2022-36 also covers partnership and estate/trust returns in the exemption (1065/1041).
However, the benefits for foreign individuals and companies are pretty limited. For example, taxpayers have not complied with international reporting obligations for several years. In these cases, the relief would only apply to the years 2019 and 2020 and the returns mentioned above. When other years would also be subject to penalties, other options provide a safer route, such as the Streamlined Foreign Offshore procedures, which reduce exposure by several years and forms not included in the relief.
The Streamlined Foreign Offshore procedure would cover 3 years and the promise that the IRS would not request years before that. If the failure to file were for more than 2019 & 2020, the Streamlined Foreign Offshore procedure would be more appropriate. Furthermore, not all forms are covered by Notice 2022-36. For example, Notice 2022-36 doesn’t cover forms 8938 and FBAR in the automatic exemption. International clients would have to file a form 8938 and an FBAR to report their international holdings, starting with their non-US bank accounts. These filing forms are among the most crucial filing states for taxpayers. The fact that they do not receive automatic relief again pushes taxpayers with foreign holdings to consider other alternatives, including the Streamlined Foreign Offshore procedures. Other less common forms, such as 8865 (Certain Foreign Partnership Statement) or 8858 (Disregarded Foreign Entity Information Statement), are also not included in the relief framework.
It is important to note that the relief does not explicitly apply to returns sanctioned for fraudulent failure to file (under section 66541(f)) or if the IRS has accepted an offer in compromise, which includes a late filing penalty. In addition, the relief provided by Notice 2022-36 does not apply to fines determined in the Final Agreement (Section 7121). It also doesn’t apply to penalties assessed through legal proceedings.
Finally, although Notice 2022-36 provides that the relief will apply automatically, we expect that taxpayers will face inconsistencies in information or that the IRS might not mitigate penalties due to operational errors. In these cases, it will be relevant to contact the tax authorities to receive appropriate assistance.
Given the limited scope of the relief and the limited time to qualify for it, particularly for taxpayers filing international returns, time is critical to review the specific case and any potential non-compliance that may allow under Notice 2022-36.
1.6 million Americans are expected to receive a refund/credit thanks to Notice 2022-36
The agency said the goal is to assist individuals and businesses affected by the pandemic. It will also allow the IRS to focus its resources on processing its large backlog of tax returns and taxpayer letters to help return to normal business during the 2023 tax season.
“During the pandemic, the IRS has worked hard to support the state and help people in various ways,” said IRS Commissioner Chuck Rettig. “The waiver announced today is another way the agency supports people in these unprecedented times. This waiver will be automatic for qualified individuals or businesses; no call is required.”
Nearly 1.6 million taxpayers who have already paid penalties will receive more than $1.2 billion in refunds. Most of these refunds will be issued by the IRS in time so taxpayers can receive their refunds by the end of September.
“Penalty relief is a complex issue for the IRS to administer,” said IRS Commissioner Chuck Rettig. “We’ve been working on this initiative for months following concerns we’ve heard from taxpayers, the tax community and others, including Congress. This is another major step to help taxpayers, and we encourage those affected by this to review the guidelines.”