In an unexpected announcement on August 24, 2022 (Notice 2022-36), the Internal Revenue Service (IRS) issued broad penalty relief as part of its response to the challenges created by the Covid 19 pandemic. In summary, the IRS has effectively waived late filing penalties for many 2019 and 2020 tax returns if the tax returns are filed before September 30, 2022. Some of the tax returns included in this penalty relief are[1]:
- Form 1040, U.S. Individual Income Tax Return
- Form 1041, U.S. Income Tax Return for Estates and Trusts
- Form 1120, U.S. Corporation Income Tax Return
- Form 1065, U.S. Return of Partnership Income
- Form 1120S, U.S. Income Tax Return for an S Corporation
Perhaps more significantly, the IRS included in this relief late filing penalties associated with certain international informational returns (IIR). Some of these returns carry an automatic penalty of $25,000 for each late filed return. The relief includes:
- Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
- Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
- Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
- Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
In order to qualify under this Notice, the tax return or IIR must be filed by September 30, 2022.
Other considerations include:
- The relief appears to apply to 2019 and 2020 tax returns only. This seems consistent with the intended purpose of the program, which is to benefit tax returns processed during the height of the Covid 19 pandemic.
- The relief is for late filing penalties only. It does not apply to late payment penalties.
- According to the Notice, no action is required by the Taxpayer to take advantage of the penalty relief. While the Notice indicates that penalties covered by the Notice that have been paid will be automatically refunded, Taxpayers may also wish to consider seeking a refund using IRS Form 843, Claim for Refund and Request for Abatement, if a refund is not timely issued.
- The Notice indicates that the relief for Forms 5471 and 5472 applies when the late-filed Form 5471 or Form 5472 is attached to a late-filed Form 1120 or Form 1065. It is unclear if this is an exclusive requirement for relief or if an otherwise timely filed Form 1120 or Form 1065 could be amended to include an omitted Form 5471 or Form 5472. It is also unclear if an individual Taxpayer who timely filed a Form 1040 but did not include Form 5471 would be eligible for relief with an amended Form 1040 (Form 1040X).
- In addition to the above penalty relief, the IRS provided relief for certain information reporting forms (such as Forms 1099) as follows:
- 2019 returns that were filed on or before August 1, 2020
- 2020 returns that were filed on or before August 1, 2021
WG Observation: While this penalty relief is welcome, the requirements to file the impacted returns or IIRs by September 30, 2022, may create a significant challenge. Thus, immediate action may be required for Taxpayers who have not yet filed the impacted returns.
The above discussion is a summary of the guidance issued by the IRS. Please refer to Notice 2022-36 for more information.
[1] This is not an exhaustive list. Please see the text of the notice for more details.
