IRS announces penalty relief for nearly 5 million taxpayers

On December 19, the Internal Revenue Service announced it will provide $1 billion in penalty relief for taxpayers to whom the IRS did not send automated collection-reminder notices during the pandemic.

The IRS is waiving the failure-to-pay penalties for eligible taxpayers affected by this situation for tax years 2020 and 2021. The IRS estimates that five million tax returns, filed by 4.7 million individuals, businesses, trusts, estates and tax-exempt organizations, are eligible for the penalty relief.

The relief is automatic, and eligible taxpayers do not need to take any action to get it. Eligible taxpayers who already paid their full balance will also benefit from the relief, as the IRS will issue a refund or credit the payment toward another outstanding tax liability.

Eligibility. The penalty relief applies to taxpayers who meet the following criteria:

• individuals, businesses, trusts, estates and tax-exempt organizations that filed certain Forms 1040, 1120, 1041, and 990-T income tax returns for tax years 2020 or 2021;
• had an assessed tax of less than $100,000; and
• were in the IRS collection notice process or were issued an initial balance-due notice between February 5, 2022, and December 7, 2023.

The $100,000 limit applies separately to each return and each entity. The failure-to-pay penalty will resume on April 1, 2024, for taxpayers eligible for relief.

• See more in IRS announcement IR-2023-244

Background. Starting in February 2022, the IRS stopped sending automated reminders to pay overdue tax bills. The reminders would have normally been issued as a follow-up after the initial notice.

However, while the reminders stopped, the failure-to-pay penalty has continued to accrue for taxpayers who did not fully pay their bills in response to the initial balance-due notice. The disconnect between those two issues led to the penalty relief announced this week.

Corrective Measures. The IRS has adjusted eligible individual accounts and will follow with adjustments to business accounts in late December to early January, and then trusts, estates and tax-exempt organizations in late February to early March 2024. Nearly 70% of the individual taxpayers receiving penalty relief have incomes under $100,000 per year.

To help taxpayers as the normal processes resume, the IRS will be issuing a special reminder letter starting in January 2024. The letter will alert the taxpayer of their liability, options for payment, and the amount of penalty relief, if applied.

If you are eligible for the penalty relief and have questions about how it affects your specific tax situation, please contact your Frazer Ryan tax attorney.