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The bad news is that the IRS is restarting collection notices and enforcement in the years prior to tax year 2022 (see
This pandemic-related penalty relief provision is the second major IRS forgiveness initiative in the past two years. The
For example, individual and corporate taxpayers who filed their 2019 and 2020 late returns before Sept. 30, 2022, were given failure-to-file penalty relief. The IRS applied the penalty relief automatically in the late summer and early fall of 2022 to qualifying taxpayers.
The second round of relief, which was
In the announcement, the IRS noted that 4.7 million taxpayers qualified for the new relief. The agency states that the average penalty relief in the 2023 initiative will be $206 per qualifying taxpayer. In December 2023, the IRS started some of the abatements sending out refunds to those who had already paid the penalty for the 2020 and 2021 tax years.
How do you qualify?
There are four requirements:
- Type of filer: The relief only applies to taxpayers who file Forms 1040, 1120, 1041, and 990-Ts. The big beneficiaries will be 1040 and 1120 filers who pay late.
- Tax years: The relief only applies to tax years 2020 and 2021.
- Amount owed: The taxpayer must owe less than $100,000 in assessed income tax. The $100,000 limit applies separately to each year. Taxpayers do not qualify for the relief in any year that has an assessed tax balance greater than $100,000. The assessed balance limit does not include applicable penalties and interest added to the balance after the initial assessment.
- Assessment notification date: The taxpayer must have had their assessed tax bill before Dec. 7, 2023, via IRS notice CP14 (individual), CP161 (business) or its equivalent notice. This provision presumably removes many taxpayers who would have filed in the latter part of October 2023 or after.
The failure-to-pay penalty relief period begins on the date the IRS issued an initial balance due notice to the eligible taxpayer, or Feb. 5, 2022, whichever is later. The penalty relief will only be provided through March 31, 2024. After that date, the IRS will continue to charge the failure-to-pay penalty on any outstanding balance owed.
The penalty can add up quickly. It is normally 0.5% per month. A timely filed taxpayer can reduce their penalty to 0.25% by immediately entering into a payment plan with the IRS. If a taxpayer enters IRS collection, the failure-to-pay penalty rate increases to 1.0% per month. The maximum failure-to-pay penalty that can be assessed for any year is 25%.
How do you know if your client qualifies and has received the relief?
Many timely filed taxpayers who paid their failure-to-pay penalty for 2020 and 2021 have already received their abatement, and a refund check (with interest!) in late December 2023.
However, many taxpayers have not yet received their abatement of the penalty. Specifically, taxpayers who have an outstanding balance which continues to accrue the monthly failure-to-pay penalty have not yet seen the relief posted to reduce their tax bills.
In the announcement, the IRS stated that most abatements will occur before March 31, 2024. Taxpayers assigned to IRS collection enforcement and received IRS Letter LT38, "Reminder- Notice Resumption," should see their penalty relief on that notice. The LT38 notices were due to be issued to taxpayers in January and February 2024 as the IRS returns to its automated collection enforcement.
Taxpayers and their professionals can check their IRS account transcripts for failure-to-pay penalty relief. Failure to pay penalties show in the transaction section of an account transcript (Transaction code 270/276). Abatements show up as a reversal of the penalty (Transaction code 271/277).
What if your client has not yet received the relief?
In the Dec. 19, 2023, announcement, the IRS states that abatements should be complete by March 31, 2024. If the taxpayer has not received the relief, there are two options when to request penalty relief:
- Call the IRS: Tax pros can get authorized via Form 2848, "Power of Attorney," or Form 8821, "Tax Information Authorization," and contact the IRS's Practitioner Priority Service. PPS can handle most account issues, such as penalty relief, or provide next steps to get relief.
- Request relief via Form 843: Taxpayers and tax pros can file a Form 843, "Claim for Refund," to request abatement of the penalty. IRS Notice 2024-7 should be cited in the request as the basis for the relief.
Phone requests work well for securing penalty relief for first-time penalty abatement and other administrative waivers such as the 2022 failure-to-file or the 2023 failure-to-pay penalty relief waivers. When in doubt, you can use Form 843 to request relief.
It usually takes the IRS two to three months to grant relief or deny the request. If you are not successful with the relief, you can request an appeal, or request assistance from the Taxpayer Advocate's office if there is an obvious IRS error in determining relief.
What's next?
Generally, the IRS successfully executed the 2022 failure-to-file penalty relief by automatically abating the penalties without any taxpayer or tax pro action.
However, administering the 2023 penalty relief will likely be more complicated because taxpayers who currently owe may have an ongoing penalty as the failure-to-pay penalty accrues monthly, unlike the failure-to-file penalty which is assessed once on the taxpayer.
Tax pros should watch their client's account transcripts closely to make sure that their client is getting the full relief allowed by the IRS.
