The National Taxpayer Advocate published a blog post[1] that discussed the impact of Notice 2022-36 that was issued by the IRS. The information in the blog clarifies issues related to the Notice.

Failure to File Penalty is Waived, But Not Failure to Pay

The Notice did not provide a waiver for all penalties, and the blog begins by noting that while the failure to file penalty under IRC §6651(a)(1) is waived under the Notice, the relief does not apply to the failure to pay penalty under IRC §6651(a)(2) that such taxpayers would generally also be subject to.

The blog post notes:

A failure-to-file penalty (IRC § 6651(a)(1)) is charged on returns filed after the due date or extended due date, absent a reasonable cause for filing late. The penalty is generally calculated at five percent of the tax liability for each month the return is filed late, up to a maximum of 25 percent. For example, if you owe $10,000, the penalty is $500 per month, up to a maximum of $2,500. Beyond the failure-to-file penalty, there are additional penalties for failure to file information returns that fall under various IRC sections. Many taxpayers subject to failure-to-file penalties also receive penalties under IRC § 6651(a)(2) for failing to pay the tax due by the due date of the return. These are two distinct penalty categories.

These failure-to-file penalties generated additional account inquiries and requests for relief, which only further strained already-inadequate customer service resources and increased the paper correspondence awaiting processing. Because of the scale of the problem, the National Taxpayer Advocate, members of Congress, and tax practitioner groups called on the IRS to implement a comprehensive remedy, including reversing and removing penalties. To its credit, the IRS has acted and today announced a broad late-filing administrative penalty relief program. This program only applies to penalties for late filing and does not apply to penalties for failing to pay the tax due by the original deadline.[2]

Mechanics of the Relief Program

The blog indicates how the program will process relief:

The IRS’s penalty relief program commences on August 25, 2022, and automatically provides late-filing penalty relief without the need for taxpayers to request the relief and will continue to be applied to returns received through September 30, 2022. Notices and refunds are being initiated now and many of the refunds will be completed by the end of September. Certain penalties abated manually, such as those associated with the late filing of Forms 3520 and 3520-A, will take somewhat longer to process.[3]

The post also notes that refunds for penalties already paid will most likely be made by check:

If penalties have been assessed, they will be removed, and if a request for abatement was denied, it will now be automatically granted. If the abatement or removal of penalties generates a refund, it will first be applied to any outstanding liabilities and the balance will be paid by check and mailed to taxpayers’ current address in the IRS’s system. There is no option for direct deposit or debit card. In very rare circumstances, a small percentage of taxpayers will receive their refund via direct deposit, but the overwhelming majority of refunds will be distributed via check.[4]

Impact on First Time Abatement of This Program

The blog also clarifies how this relief affects first time abatement relief:

First Time Abatement and reasonable cause not impacted. This unprecedented program is conceptualized as broad administrative penalty relief and is designed specifically to meet the exigent circumstances of the pandemic. The relief does not fall into the category of either the First Time Abatement (FTA) or reasonable cause relief. FTA is an administrative waiver that provides otherwise-compliant taxpayers relief from penalties if certain criteria are met. The policy behind FTA is to reward taxpayers for having a clean compliance history, while recognizing that taxpayers occasionally make a mistake. The reasonable cause defense to the assertion of penalties, which is defined in the Internal Revenue Code, generally is based on the taxpayer’s facts and circumstances in determining if a taxpayer exercised ordinary business care and prudence.

The current penalty relief program will neither preclude taxpayers from receiving FTA for the next three years nor require justification, as would be the case with a request for reasonable cause. It is simply a favorable grant of administrative forbearance that the IRS is providing to benefit taxpayers and to address its own administrative burdens.

[1] “NTA Blog: Good News: The IRS Is Automatically Providing Late Filing Penalty Relief for Both 2019 and 2020 Tax Returns. Taxpayers Do Not Need to Do Anything to Receive this Administrative Relief,” NTA Blog, August 24, 2022, https://www.taxpayeradvocate.irs.gov/news/nta-blog-the-irs-is-automatically-providing-late-filing-penalty-relief-for-both-2019-and-2020-tax-returns/ (retrieved August 28, 2022)

[2] “NTA Blog: Good News: The IRS Is Automatically Providing Late Filing Penalty Relief for Both 2019 and 2020 Tax Returns. Taxpayers Do Not Need to Do Anything to Receive this Administrative Relief,” NTA Blog, August 24, 2022

[3] “NTA Blog: Good News: The IRS Is Automatically Providing Late Filing Penalty Relief for Both 2019 and 2020 Tax Returns. Taxpayers Do Not Need to Do Anything to Receive this Administrative Relief,” NTA Blog, August 24, 2022

[4] “NTA Blog: Good News: The IRS Is Automatically Providing Late Filing Penalty Relief for Both 2019 and 2020 Tax Returns. Taxpayers Do Not Need to Do Anything to Receive this Administrative Relief,” NTA Blog, August 24, 2022