IRS Provides Relief for Certain 2019 and 2020 Tax Return Penalties

(Parker Tax Publishing September 2022)

The IRS issued a notice providing relief from certain failure to file penalties and certain international information return penalties with respect to tax returns for tax years 2019 and 2020 that are filed on or before September 30, 2022. It is also providing relief from certain information return penalties with respect to tax year 2019 returns that were filed on or before August 1, 2020, and with respect to tax year 2020 returns that were filed on or before August 1, 2021. Notice 2022-36.

Background

The Internal Revenue Code contains a number of penalties for failing to timely file tax returns or information returns or notices. For example, under Code Sec. 6651(a)(1), penalties can be imposed for failing to file a tax return on time and Code Sec. 6038 generally imposes a penalty for the failure of certain U.S. persons to furnish (on or before the date prescribed) certain information with respect to a controlled foreign corporation or a controlled foreign partnership that the person owns. In addition, Code Sec. 6039F(c) imposes a penalty on a U.S. person for the failure to furnish (on or before the date prescribed) certain information with respect to the receipt large gifts or bequests from foreign persons. Code Sec. 6677 generally imposes a penalty on a U.S. person for the failure to file (on or before the date prescribed) a notice or return required by Code Sec. 6048 with respect to transactions with, or ownership of, a foreign trust. Code Sec. 6698(a) imposes penalties on a partnership for failing to file a return and failing to show the required information on the return. Code Sec. 6699(a) provides for similar penalties on S corporations. Generally, the foregoing penalties do not apply if the taxpayer can show that the failure to timely file the return or to furnish the required information or to provide the required notice, as applicable, is due to reasonable cause.

In March of 2020, in response to the Coronavirus Disease 2019 (COVID-19) pandemic, the President issued an emergency declaration instructing the Treasury Secretary to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, pursuant to Code Sec. 7508A(a). As a result, the IRS issued a series of notices and other guidance that provided relief to affected taxpayers by extending federal income tax return deadlines. Additions to tax or penalties for failing to timely file returns continued to accrue for taxpayer who did not file by the postponed due dates.

According to the IRS, the COVID-19 pandemic had an unprecedented effect on the IRS's personnel and operations. The agency was called upon to support emergency relief for taxpayers, such as distributing economic impact payments, while sustaining its regular operations in a pandemic environment with limited resources, where employees were sometimes unable to be physically present to process tax returns and correspondence. In response to these challenges, the IRS said that it has been working aggressively to process backlogged returns and taxpayer correspondence to return to normal operations for the 2023 filing season. Last week, as a result of these issues, the IRS issued Notice 2022-36. The notice provides penalty relief to certain taxpayers so that the IRS can focus its resources more effectively as well as provide relief to taxpayers affected by the COVID-19 pandemic.

Notice 2022-36

Notice 2022-36 provides that the IRS will not impose the penalties listed below with respect to the specified tax returns for tax years 2019 and 2020 that are filed on or before September 30, 2022. The penalties listed with respect to the four returns listed below for the 2019 and 2020 tax years will be automatically abated, refunded, or credited, as appropriate without any need for taxpayers to request this relief.

Additions to tax under Code Sec. 6651(a)(1) for failing to file the following income tax returns:

(1) 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);

(2) 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;

(3) 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);

(4) Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; and

(5) 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)).

Certain penalties under Code Secs. 6038, 6038A, 6038C, 6039F and 6677 for failure to timely file the following international information returns:

(1) Penalties systematically assessed when a Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and/or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is attached to a late-filed Form 1120 or Form 1065; and

(2) Penalties assessed by the campus assessment program with respect to filings on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Code Sec. 6048(b)).

(3) Penalties under Code Sec. 6698(a)(1) for failure to timely file and under Code Sec. 6698(a)(2) for failure to show the required information on a Form 1065, U.S. Return of Partnership Income.

(4) Penalties under Code Sec. 6699(a)(1) for failure to timely file and under Code Sec. 6699(a)(2) for failure to show the required information on a Form 1120-S, U.S. Income Tax Return for an S corporation.

In addition, the IRS will not impose the penalties under Code Sec. 6721(a)(2)(A) for failure to timely file any information return (as defined in Code Sec. 6724(d)(1)) that meets the following criteria:

(1) 2019 returns that were filed on or before August 1, 2020, with an original due date of January 31, 2020; February 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically); or March 15, 2020; or

(2) 2020 returns that were filed on or before August 1, 2021, with an original due date of January 31, 2021; February 28, 2021 (if filed on paper) or March 31, 2021 (if filed electronically); or March 15, 2021.

The penalty relief in Notice 2022-36 is not available with respect to any return to which the penalty for fraudulent failure to file under Code Sec. 6651(f) or the penalty for fraud under Code Sec. 6663 applies. The penalty relief also does not apply to any penalties in an accepted offer in compromise under Code Sec. 7122; nor does it apply to any penalty settled in a closing agreement under Code Sec. 7121 or finally determined in a judicial proceeding.

For a discussion of penalties relating to the filing of tax and information returns, see Parker Tax ¶262,100.

Disclaimer: 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. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing 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. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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