The Internal Revenue Service (IRS) announced it will provide penalty relief to approximately 4.7 million taxpayers who did not receive automated collection notices during the COVID-19 pandemic. The amount of relief is expected to total about $1 billion in penalties.
Background
During the COVID-19 pandemic, the IRS suspended the automatic sending of reminders for overdue tax payments. These reminders were supposed to be issued after an initial notice. This means that some taxpayers have not received a notice from the IRS for over a year.
It is important to understand that only the sending of reminders was suspended – the accumulation of non-payment penalties continued for taxpayers who did not pay their full tax liabilities.
Additionally, the suspension only affected the sending of subsequent reminders. The IRS did not suspend sending initial balance due notices to taxpayers such as CP14 and CP161 notices.
Reminder Letters
To assist taxpayers as normal operations resume, the IRS will issue a special reminder letter in January 2024 for individuals who have tax debts from before 2022, as well as for corporations and exempt organizations with tax debts prior to 2023 (there are exceptions for those with outstanding debts in multiple years).
The reminder letter will explain any tax liability, how to pay, and the amount of penalty relief, if applicable. After receiving the reminder, those taxpayers with long-standing unresolved tax issues will receive a subsequent notice informing them of a more serious step in the tax collection process. If you cannot pay your balance in full, the IRS encourages you to visit IRS.gov/payments to arrange to settle your bill.
The IRS will issue these notices and due letters at various stages throughout 2024 to ensure that taxpayers with questions or needing assistance can reach the IRS. This will also provide extra time for tax professionals who assist taxpayers.
Penalty Relief
The IRS is also taking steps to waive the non-payment penalty for eligible taxpayers affected by this situation for the 2020 and 2021 tax years. The IRS estimates that 5 million tax returns – filed by 4.7 million individuals, businesses, and tax-exempt organizations – are eligible for penalty relief.
The total penalty relief amounts to approximately $1 billion, or about $206 per return. According to the IRS, approximately 70% of those eligible for the relief make less than $400,000 per year.
This penalty relief is automatic. This means that if you are an eligible taxpayer, no further action is required on your part.
Eligible taxpayers who have already paid their full balance will also benefit from the relief – if the eligible taxpayer has already paid non-payment penalties for the 2020 and 2021 tax years, the IRS will issue a refund or apply the payment to another outstanding tax obligation.
The IRS has already adjusted the accounts of eligible individuals, and adjustments for business accounts will follow from late December to early January. Trusts, estates, and tax-exempt organizations will see relief from late February to early March 2024.
If the automatic relief results in a refund or credit, individual and business taxpayers will be able to see it by viewing their tax account.
The IRS will send the first round of refunds starting now through January 2024. If a taxpayer does not receive a refund, a special reminder notice with their updated balance may be sent at the beginning of 2024. Taxpayers with questions about the penalty relief can contact the IRS after March 31, 2024.
Taxpayers
Qualified Individuals
The penalty relief only applies to qualified taxpayers whose assessed tax liability is less than $100,000. Qualified taxpayers include individuals, corporations, trusts, properties, and tax-exempt organizations, as well as properties that submitted income tax returns using forms 1040, 1120, 1041, and 990-T for the tax years 2020 or 2021, with a calculated tax liability under $100,000, and that were in the process of receiving a collection notice from the IRS – or had an initial balance due notice issued between February 5, 2022, and before December 7, 2023.
The $100,000 threshold applies to each return and each entity individually.
Penalty collection for non-payment will resume on April 1, 2024, for qualified taxpayers eligible for relief.
Non-Qualified Taxpayers
Taxpayers who are not eligible for automatic relief still have options. These taxpayers can utilize existing penalty relief procedures, such as applying for relief based on reasonable cause criteria or the first-time penalty abatement program. Visit IRS.gov/penaltyrelief for details.
Payment Methods
The IRS reminds taxpayers that there are a number of payment options and online tools that can assist taxpayers in settling outstanding tax debts, whether it’s a new tax bill or old tax debt for an unfiled return.
“The IRS wants to help taxpayers and provide easy options for addressing outstanding tax bills and avoiding additional interest and penalties”, said Werfel. “People receiving these notices should remember that there are often overlooked options that can help them set up an automatic payment plan or catch up on their tax filings. Additional improvements in the collections area will be a key focus for the IRS in the future as we continue and accelerate our transformation efforts”.
Penalties and Interest
The failure to file penalty is typically 5% of the unpaid tax due for each month or part of a month the return is late, up to a maximum of 25%. Once the return is filed, the penalty ceases to accrue. If your return is more than 60 days late, the minimum failure to file penalty is $435 or 100% of the tax due, whichever is less. The failure to file penalty will not be waived under an IRS penalty relief plan.
If you do not pay the tax due, you may be subject to a failure to pay penalty. The failure to pay penalty is 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid. Similar to the failure to file penalty, the failure to pay penalty will not exceed 25% of the tax due.
If both the failure to file penalty and the failure to pay penalty apply in the same month, the failure to file penalty is reduced by the failure to pay penalty for that month, resulting in a total combined penalty of 5% for each month or part of a month the return is late. For example, if you are subject to a 5% failure to file penalty and a 0.5% failure to pay penalty, the IRS will apply a 4.5% failure to file penalty and a 0.5% failure to pay penalty.
The IRS is required by law to assess interest when the tax balance is not paid by the due date. Interest cannot be reduced due to reasonable cause. Interest is based on the amount of tax owed for each day that payment has not been made in full. Interest accrues daily and is calculated on the previous day’s balance plus interest. Interest rates are set quarterly and can vary based on the type of tax (for example, individual taxes or business taxes).
More
For more information
For more information, see IRS Notice 2024-7, which explains how the IRS is providing penalty relief for qualified taxpayers affected by the COVID-19 pandemic and assisting them in meeting their federal tax obligations.
Source: Forbes
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