Act by September 30th to Qualify for IRS Expanded Penalty Relief

August 26, 2022

By Miri Forster

IRS Notice 2022-36 provides welcome penalty relief for taxpayers who have failure-to-file penalties and certain information return (IIR) penalties for tax years 2019 and 2020. Taxpayers do not have to request abatement from the IRS to receive penalty relief. Applicable penalties will be automatically waived, abated, refunded or credited as appropriate. With limited exceptions, tax returns for 2019 and 2020 must be filed on or before September 30, 2022, to qualify for relief. Penalty relief is being provided to allow the IRS to focus its resources more effectively and further support taxpayers affected by the pandemic.

Relief for Failure to File Penalties

For tax years 2019 and 2020, Notice 2022-36 (the “Notice”) provides relief from failure-to-file penalties under IRC Sec. 6651(a)(1) on the following specified income tax returns filed on or before September 30, 2022:

Form 1040 Series

  • Forms 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. Individual 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
  • Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)

Form 1041 Series

  • Form 1041, U.S. Income Tax Return for Estates and Trusts
  • Forms 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts
  • Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts

Form 1120 Series

  • 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
  • Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B)
  • Form 1066, U.S. Real Estate Mortgage Investment Conduit (“REMIC”) Income Tax Return

Form 990 Series

  • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation
  • Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e))

Observations

Penalty relief applies to failure-to-file penalties under IRC Sec. 6651(a)(1). It does not extend to late-payment penalties.

Also, penalty relief does not apply to Form 990, Return of Organization Exempt from Income Tax.

Most refunds or credits for qualifying penalties will be issued by the end of September, but taxpayers are encouraged to allow three months for the IRS to adjust accounts. The IRS will offset a penalty refund against other past-due tax liabilities prior to issuing a refund.

For business taxpayers on a fiscal year end, relief is available for fiscal years that begin in 2019 and 2020.

Relief from Certain International Information Return Penalties

For tax years 2019 and 2020, the Notice also provides relief from failure-to-file penalties for the following international information returns (“IIRs”) that are filed on or before September 30, 2022:

  • Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, where late-filing penalties are automatically assessed due to a late-filed Form 1120 or Form 1065.
  • Forms 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, where late-filing penalties are automatically assessed due to a late-filed Form 1120 or Form 1065.
  • Penalties assessed by the Service Center for late-filed Forms 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.
  • Penalties assessed by the Service Center for late-filed Forms 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner (under Sec. 6048(b)).

Observations

Notice 2022-36 is welcome relief, especially for international information returns that result in enormous penalties for failure to timely file. Prior to the Notice, the following penalties would apply for 2019 and 2020:

  • A late-filed Form 5471 and Form 5472 is subject to a penalty of $10,000 and $25,000, respectively.
  • Taxpayers who do not timely file Form 3520 may be subject to a penalty equal to 35% of the value of property transferred to a foreign trust or 5% per month (up to 25%) of the value of the foreign gift received.
  • A late-filed Form 3520-A triggers a penalty equal to the greater of $10,000 or 5% of the gross value of the portion of foreign trust assets owned.

The Notice applies to IIRs that are attached to the above-mentioned income tax returns and are assessed a penalty at filing. Relief does not extend to IIR penalties that are subsequently determined during an IRS exam. Penalty relief does not apply to tax years prior to 2019.

Notice 2022-63 does not provide relief for late-filed Form 8865 (Return of U.S. Persons with Respect to Certain Foreign Partnerships), Form 8858 (Information Return of U.S. Persons with Respect to Foreign Disregarded Entities and Foreign Branches), Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, Form 8938 (Statement of Specified Foreign Financial Assets), or FBARs (FinCEN 114).

Taxpayers should consider other options for penalty relief in situations not covered by the Notice. These include the IRS Streamlined Offshore Programs, the Delinquent International Information Return Submission Procedures, and the Delinquent FBAR Submission Procedures.

Relief from Partnership and S Corporation Late-Filing Penalties

For tax years 2019 and 2020, partnerships that file Form 1065, U.S. Return of Partnership Income, may qualify for relief from failure to timely file penalties under IRC Sec. 6698(a)(1) or penalties imposed for failure to show required information under IRC Sec. 6698(a)(2).

Similarly, S corporations that file Form 1120-S, U.S. S Corporation Income Tax Return, for 2019 and 2020 may qualify for relief from failure-to-file penalties under IRC Sec. 6699(a)(1) and penalties for failure to provide required information under IRC Sec. 6699(a)(2).

To qualify under the Notice, Forms 1065 and Forms 1120-S for 2019 and 2020 must also be filed on or before September 30, 2022.

Relief from Other Information Return Penalties

The IRS will also not impose penalties under IRC Sec. 6721(a)(2)(A) for failure to timely file certain information returns (as defined in IRC Sec. 6724(d)(1)) if:

  • The 2019 information returns 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.
  • The 2020 information returns 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.

Information returns include, but are not limited to, Form 1098, Form W-2, Form 1099, Form 1099-NEC, Form 1099-DIV, Form 1099-INT, Form 1099-MISC, and Form 1099-B.

Observations

For information returns defined in IRC Sec. 6724(d)(1), relief only applies to late-filing penalties. It does not extend to penalties assessed for incorrect information or for non-compliance with electronic filing requirements.

Relief only applies to the tax returns and penalties specified in Notice 2022-36. Relief does not apply to any return to which the penalty for fraudulent failure to file under IRC Sec. 6651(f) or the penalty for fraud under IRC Sec. 6653 applies. The Notice does not apply to penalties in a previously accepted offer in compromise, a previously executed IRS closing agreement, or penalties finally determined in a judicial proceeding.

About Miri Forster

Miri Forster, National Leader of the Tax Controversy practice, has over 20 years of experience providing tax dispute resolution services to public and private corporations, partnerships and high net worth individuals on a wide range of technical and procedural issues.