COVID-19 made the 2019 and 2020 filing seasons so difficult that the IRS recently announced automatic penalty relief for certain tax returns and international information returns that were not timely filed.
In the notice, failure-to-file penalties are waived under section 6651(a)(1) for late-filed Forms 1040s, 1041s, 1120s, 1065s and certain 990s. It also provides relief under section 6721 for certain informational returns, including 1099s.
The administrative pronouncement recognizes that the 2019 and 2020 filing seasons were challenging not just for the IRS but also taxpayers, and this relief will give more certainty to taxpayers as well as free up IRS resources.
In addition to waiving penalties, the notice had three taxpayer-favorable components.
The first component offers a window for taxpayers who have not yet filed their taxes an opportunity to file them and qualify for the relief. Certain 2019 and 2020 tax returns filed before Sept. 30, 2022, are still eligible for penalty abatement.
Second, the notice specifically states certain international information returns filed with tax returns are eligible for the penalty relief. Those that are in scope include Forms 5471 and 5472 attached to a late-filed Form 1120 or 1065 for the 2019 or 2020 tax year for which penalties are systematically assessed. However, Forms 8858 and 8865 attached to a late-filed Form 1120 or 1065, which do not generate an automatic penalty assessment, do not appear to be included in the notice’s scope. It is also not clear if the notice includes late-filed Forms 5471 and 5472 if they were initially omitted as an attachment to a timely filed tax return.
Nevertheless, the notice does grant penalty relief for other international information returns, including Forms 3520 and 3520-A, which are filed separately with the IRS as distinct tax returns and not as attachments to other forms. Many international information returns inflict severe penalties for late filing (e.g., a $10,000 fine per Form 5471 omission and $25,000 fine per Form 5472 omission). Because some tax returns have multiple attached international information returns, this penalty relief could alleviate a significant financial burden for some taxpayers.
The third taxpayer-favorable component is the method by which the IRS is relieving the penalty. Taxpayers do not need to reach out to the IRS to request the abatement; the relief is being granted automatically, and late filers who already paid their penalties will receive refunds.
Taxpayers should note that they will still need to respond to any IRS notices that have a statutory or regulatory deadline to contest penalties. They should also understand that this notice is separate from reasonable cause relief and the first time abatement program.
While this will provide relief for many taxpayers, it only applies to the failure-to-file penalty and not the failure-to-pay penalty. Furthermore, there are omissions as to who may qualify. In fact, the AICPA has requested the IRS “expand, modify and clarify the scope” of the relief as well as extend the deadline to Dec. 31, 2022, from Sept. 30.
Regardless, taxpayers who have the opportunity to take advantage of this relief should strongly consider doing so. Even if a taxpayer isn’t eligible, the IRS’ acknowledgment that those two filing seasons warranted this type of relief may make it easier to receive reasonable cause abatement.
For more information or to learn how a Baker Tilly professional can help you, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.