Due to pandemic disruptions, the IRS failed to issue required automated collection notices to roughly 4.7 million taxpayers between 2020 and 2022. Consequently, the agency has agreed to waive an estimated $1 billion in associated penalties as they work to resolve these past-due accounts. Individuals and businesses that went over two years without receiving standard payment reminders will now gain reprieve from compounding fines. 

The WSJ and Forbes both reported on this As the IRS continues its attempts to normalize operations and remedy cascading impacts from COVID-19, this penalty relief aims to ease financial pressures on millions of taxpayers neglected through systemic notifications breakdowns outside of their control. 

Forgoing steep fees resulting directly from internal administrative failures upholds accountability on the part of the IRS while preventing further undue burdens on those struggling taxpayers still working in good faith to resolve overdue payments from recent tax years.

Background    

The WSJ reported that close to 4.6 million individual taxpayers who owe for tax years 2020 and 2021 might be eligible for the penalty relief. The IRS is doing this because it stopped sending out many collection letters during the pandemic. 

During the COVID-19 pandemic, the IRS temporarily suspended sending out automated reminder notices for overdue tax bills. This meant that some taxpayers haven’t received any communication from the IRS for over a year, even if they missed payments.

It’s important to note that this suspension only applied to reminder notices, not the initial balance due notices. This means that penalties for unpaid taxes continued to accrue during this time.

Now, the IRS is preparing to resume sending out collection notices for tax years 2020 and 2021. However, they’re taking steps to help taxpayers manage their outstanding balances before the notices arrive.   

Who is Eligible for this Tax Penalty Relief? 

The penalty relief is designed for eligible taxpayers include individuals, businesses, trusts, estates and tax-exempt organizations, and estates that filed certain Form 1040, 1120, 1041 and 990-T series income tax returns for tax years 2020 or 2021, who owe under $100,000 in taxes for 2020 or 2021 who received an initial balance due notice on or before Dec. 7, 2023. The relief expires for debts not paid by April 1, 2024.  

According to IRS guidance, eligible taxpayers will be mailed updated balance statements in early January 2023 reflecting penalty waivers from missed collection notices amid the pandemic. Some taxpayers who already paid the penalties improperly incurred from 2020-2022 will receive refund checks or account credits correcting those errors as soon as this week.

After prolonged COVID-19 disruptions, the agency resumed sending automated past-due notices for the 2022 tax year this fall. Come January, they intend to fully catch up on prior years’ unsent notifications as well. Taxpayers behind on payments can expect the gradual resumption of the IRS’s standard dunning protocols. Those wrongfully charged penalties resulting specifically from pandemic-era mailing backlogs should see corrections in early 2023.

The Penalty Relief: $206 Per Return

The Forbes article stated that the IRS estimates 5 million tax returns—filed by 4.7 million individuals, businesses, trusts, estates and tax-exempt organizations—are eligible for the penalty relief.

This comes out to approximately $206 per each individual return. According to the IRS, most—nearly 70%—of those eligible to receive penalty relief make under $400,000 a year.     

This penalty relief is automatic. That means that if you’re an eligible taxpayer, you don’t need to take any action.   

What if You Already Paid?  

If you paid your 2020 or 2021 taxes in full and any late payment penalties, the IRS will now refund those penalties or apply them to other outstanding tax debts. Hang tight – you’ll see the adjustments hit your account by December-January for businesses, February-March for trusts, estates, and tax-exempt organizations. 

If the automatic relief results in a refund or credit, individual and business taxpayers will be able to see it by viewing their tax transcript.

The IRS will send the first round of refunds starting now through January 2024. 

Conclusion 

For more information, see IRS Notice 2024-7, which explains how the agency is providing failure-to-pay penalty relief to eligible taxpayers affected by Covid-19 and to help them meet their federal tax obligations. If you have any questions feel free to reach out to Huckabee CPA for a free consultation.