IRS Applying $1 Billion in Penalty Relief as It Resumes Normal Collection Processes in 2024

The IRS announced it is providing an estimated $1 billion in automatic penalty relief to approximately 4.7 million taxpayers who failed to pay balances due for tax years 2020 and 2021. By the same token, the agency also announced that it is restarting normal automatic collection notices in January of 2024, after a nearly two-year pause during the COVID-19 pandemic. 

Pandemic Pause

The IRS sends initial balance due notices to taxpayers who have not fully paid their tax liability. This initial notice informs the taxpayer of the amount of the tax liability and how to pay the tax liability. If the taxpayer does not pay the balance due, the IRS will then send out automated reminder notices to these taxpayers. 

On February 9, 2022, the IRS temporarily suspended mailing some of these automated collection and reminder notices in response to the COVID-19 pandemic. This suspension did not apply to initial balance due notices, such as CP14 and CP161 notices. Suspended notices included balance due reminder letters such as CP501, CP503, and CP504. Accordingly, some taxpayers with outstanding balances have not been contacted by the IRS since receiving their initial balance due notices in 2022. 

Penalty Relief

Although the IRS suspended mailing automated reminder balance due notices, associated penalties continued to accrue. The IRS assesses penalties both for failure-to-file and failure-to-pay. Eligible taxpayers will have their failure-to-pay penalties waived for tax years 2020 and 2021. This relief only applies to failure-to-pay penalties – failure-to-file penalties will still be owed. Additionally, the relief is not available for any penalty for fraudulent failure-to-file or any another penalty for fraud. This relief does not apply to any accrued interest. 

Who Is Eligible for Relief?

The penalty relief will be applied automatically, and eligible taxpayers will not need to apply or take additional action to receive it. Taxpayers are eligible if they are:

• Individuals, businesses, trusts, estates, and tax-exempt organizations,
• With an assessed tax of less than $100,000 (determined per return),
• Who filed an eligible return (Forms 1040, 1041, 1120, 1120S, or 990-T), and
• Who were issued an initial balance due notice between February 5, 2022, and December 7, 2023. 

Please note, taxpayers who would have been eligible for this relief but have already paid this applicable failure-to-pay penalty will be refunded or credited. If the taxpayer has other outstanding tax liabilities, the relief amount will be applied to those liabilities instead of being refunded. The IRS has already begun sending out letters to impacted taxpayers to inform them of the amount of automatic penalty relief applied and any outstanding liability. 

Taxpayers who do not qualify for the automatic relief will still be able to request other penalty relief. These taxpayers may be able to apply for relief under the First-Time Abate program or by demonstrating reasonable cause.

Normal Collection Process Resuming

The IRS also announced it will be restarting the normal collection process for taxable years 2020 and 2021 starting in January of 2024. Taxpayers who did not receive automated reminder notices for these years will receive special reminder letters titled LT38, Reminder, Notice Resumption. This letter will inform the taxpayer of the amount of penalty relief applied (if any), their outstanding tax liability, and how to pay.

Timeline of Relief

The IRS advised that it has already begun adjusting eligible individual taxpayer accounts. These taxpayers should be receiving information regarding any liabilities and applied relief in early January 2024. Business accounts will be adjusted from late December 2023 to January 2024, and trusts, estates, and tax-exempt organizations will be adjusted from late February to early March 2024.

Taxpayers who believe they may be impacted by either the penalty relief or the resumption of automated collection notices should reach out to a trusted tax adviser.