IRS Provides Penalty Relief for Certain Returns Filed During COVID-19 Pandemic

(Parker Tax Publishing January 2024)

The IRS provided relief for certain taxpayers from additions to tax for the failure to pay income tax with respect to certain income tax returns for tax years 2020 and 2021. The penalty relief is for individuals, businesses, and tax-exempt organizations that were not sent automated collection reminder notices during the COVID-19 pandemic; the IRS also announced that it will resume issuing such notices in 2024 for tax years 2021 and earlier, thereby resuming the normal notice process for these years. Notice 2024-7.

Background

When a taxpayer does not fully pay a tax liability, the IRS sends an initial balance due notice, which includes Notice CP14, Notice of Tax Due and Demand for Payment, Balance Due $5 or More, No Math Error, and Notice CP161, Balance Due - Request for Payment or Notice of Unpaid Balance. An initial balance due notice informs the taxpayer of the amount of tax owed and instructs the taxpayer how to pay the tax liability. If the taxpayer does not pay the tax liability after receiving the initial notice, the IRS normally sends the taxpayer certain automated reminder notices.

On March 13, 2020, the President of the United States declared a national emergency in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. The same day, the President also issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Emergency Declaration). The Emergency Declaration instructed the Secretary of the Treasury to provide relief from tax deadlines under Code Sec. 7508A(a) to Americans who have been adversely affected by the COVID-19 emergency. In response, the IRS issued a series of notices and other guidance to provide relief to taxpayers.

In a February 9, 2022, press release (IR-2022-31), the IRS announced the temporary suspension of the mailing of certain automated reminder notices. The IRS did not suspend the mailing of initial balance due notices. The additions to tax for the failure to pay taxes owed under Code Sec. 6651(a)(2) and 6651(a)(3) continued to accrue for taxpayers who did not fully pay their balance due.

In Notice 2024-7, the IRS stated that it will fully resume issuing automated reminder notices in calendar year 2024 for balances due for tax years 2021 and earlier, thereby resuming the normal notice process for these tax years. The IRS has determined that the relief described below will help certain taxpayers, who were not sent reminder notices during the temporary suspension of certain automated reminder notices, meet their federal tax obligations.

Grant of Relief

Eligible taxpayers who have income filed certain specified income tax returns (eligible returns) will have the accrual of additions to tax for the failure to pay taxes owed for tax year 2020 or 2021 waived for the relief period described below or, to the extent previously assessed or paid, will have such additions to tax automatically abated, refunded, or credited to other outstanding tax liabilities, as appropriate, for the relief period. There is no need for taxpayers to request this relief. The IRS will issue a notice to each eligible taxpayer that reflects the updated amount owed and any refund or credit resulting from the automatic abatement. The relief granted in Notice 2024-7 applies to additions to tax under Code Sec. 6651(a)(2) and Code Sec. 6651(a)(3) for the failure to pay taxes owed, but does not apply to any amount of interest that accrues as a result of any underpayment.

Eligible Taxpayer

The relief granted in Notice 2024-7 is available only to eligible taxpayers for accruals of additions to tax under Code Sec. 6651(a)(2) and Code Sec. 6651(a)(3) for the failure to pay during the relief period.

An eligible taxpayer is any taxpayer:

(1) Whose assessed income tax for tax year 2020 or 2021, as of December 7, 2023, is less than $100,000, excluding any applicable additions to tax, penalties, or interest;

(2) Who was issued an initial balance due notice (including, but not limited to Notice CP14 or Notice CP161) on or before December 7, 2023, for tax year 2020 or 2021; and

(3) Who is otherwise liable during the relief period for accruals of additions to tax for the failure to pay under Code Sec. 6651(a)(2) or Code Sec. 6651(a)(3) with respect to an eligible return for tax year 2020 or 2021.

Eligible Returns

The relief granted in Notice 2024-7 is available only to eligible taxpayers who have filed an eligible return. Eligible returns generally include income tax returns of individuals, trusts, estates, certain taxable corporations, and certain tax-exempt organizations. A list of eligible returns is provided in Section III.B of Notice 2024-7.

Relief Period

The relief period for purposes of the relief granted in Notice 2024-7 is the period that begins on the date the IRS issued an initial balance due notice to the eligible taxpayer, or February 5, 2022, whichever is later, and ends on March 31, 2024. Eligible taxpayers will remain liable for any addition to tax for the failure to pay tax that accrued before or after the relief period. Eligible taxpayers will also remain liable for interest that accrues during the relief period as a result of any underpayment of tax for tax year 2020 or 2021.

Exceptions to Relief

The relief described in Notice 2024-7 does not apply to any addition to tax, penalty, or interest that is not specifically listed in the grant of relief under Section III of the notice. In addition, the relief described in Section III of Notice 2024-7 is not available with respect to any return for which the penalty for fraudulent failure to file under Code Sec. 6651(f) or the penalty for fraud under Code Sec. 6663 applies. The relief described in Section III of Notice 2024-7 also does not apply to any addition to tax for the failure to pay in an offer in compromise under Code Sec. 7122 that is accepted by the IRS because acceptance of the offer conclusively settles all of the liabilities in the offer under Reg. Sec. 301.7122-1(e)(5). Finally, the relief described in Section III of Notice 2024-7 does not apply to any addition to tax for the failure to pay that is settled in a closing agreement under Code Sec. 7121 or finally determined in a judicial proceeding.

For a discussion of the relief granted in connection with the COVID-19 pandemic, see Parker Tax ¶79,360. For a discussion of penalties for failure to pay taxes on time, see Parker Tax ¶262,105.

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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