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In Notice 2022-36 (pdf), the IRS granted relief from certain failure-to-file penalties and certain international information return penalties for most individual and business taxpayers who did not file tax returns for tax years 2019 and 2020, provided the returns are filed before 30 September 2022. In addition, the IRS will automatically (1) abate assessed, but unpaid, penalties or (2) refund or credit any penalties that were already paid by taxpayers who would have been granted this failure-to-file relief.
Treasury and the IRS "have determined that the penalty relief described in this notice will allow the IRS to focus its resources more effectively, as well as provide relief to taxpayers affected by the COVID-19 pandemic." According to the IRS, nearly 1.6 million taxpayers will automatically receive more than US$1.2 billion in refunds or credits, many before the end of September.
Specifics of penalty relief
The penalty relief applies to the following tax returns if they were not timely filed:
- Individual income tax returns: Form 1040 series (1040, 1040-C, 1040-SR, 1040-NR, 1040-NR-EZ, 1040-PR, 1040-SR and 1040-SS)
- Estate and trust income tax returns: Form 1041 series (1041, 1041-N and 1041-QFT)
- Calendar-year and fiscal-year partnership returns: Forms 1065 and 1066
- Calendar-year and fiscal-year corporate income tax returns: Form 1120 series (1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-S and 1120-SF)
- Exempt organization tax returns: Form 990-T (unrelated business income tax); Form 990-PF (excise tax payments on investment income)
The penalty relief also applies to the following information returns if they were not timely filed:
- Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) and Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) when they are attached to a late-filed Form 1120 or Form 1065.
- Campus assessment program penalties for 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))
- Required information returns on Form 1065 and Form 1120-S
- Required information returns (such as Forms 1099 or 1042-S) for (1) 2019 returns that were filed on or before 1 August 2020, or (2) 2020 returns that were filed on or before 1 August 2021
The penalty relief does not apply to any penalties in an accepted offer-in-compromise under Internal Revenue Code (IRC) Section 7122, settled in a closing agreement under IRC Section 7121 or finally determined in a judicial proceeding. It also does not apply to international information returns not listed in the notice, such as Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) and Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships).
Implications
Taxpayers who did not timely file tax or information returns for 2019 and 2020 should evaluate whether this relief covers their situation and then file missing forms by 30 September 2022.
Notice 2022-36 applies only to the forms and penalties specifically noted in Notice 2022-36. Relief is not granted for any other penalties, such as failure to pay or estimated tax penalties, or for the international information forms not specifically listed. Given the automatic nature of the penalty relief, taxpayers entitled to an abatement, refund or credit should consider reviewing an IRS transcript of their accounts to confirm that relief has been properly applied.
Of particular note, taxpayers that file Forms 3520 and 3520-A (which can generate significant penalties based on the value of the trust/gift) and incurred penalties via the campus assessment program should note that their penalties should now be automatically abated for tax years 2019 and 2020.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Tax Policy and Controversy, Washington, DC
Kirsten Wielobob
John DiIorio
Ernst & Young LLP (United States), Private Client Services, Washington, DC
Dianne Mehany
Marianne Kayan
Caryn Friedman
John Fusco
Ernst & Young LLP (United States), International Tax and Transaction Services – Private Company
Annette Rojas, Miami
RJ Acosta, Chicago
Ernst & Young LLP (United States), International Tax and Transaction Services
Donna Siemaszko, New York
Neelu Mehrotra, Providence
Daniel Messing, McLean
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
