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Uncle Sam shuffling money-no border

Taxes and COVID-19 have been inextricably linked since the coronavirus reached the United States in 2020.

Several federal relief packages were enacted, with the Internal Revenue Service given the task of distributing the payments. The agency had mixed success with this added responsibility.

Then there was the backlog of filings that resulted from COVID-related IRS office closures. This was, by all accounts, an unmitigated disaster.

The agency is still digging out of its coronavirus paperwork accumulation, and taxpayers are still dealing with problems created when automatic nonpayment penalty notices were issued.

Now the IRS is trying to make that somewhat right.

Millions of filers to get billions in relief: Today, the agency announced that it will provide tax penalty relief to most people and businesses who file certain 2019 or 2020 returns late.

It's also taking steps to help those who already paid these penalties.

That's nearly 1.6 million taxpayers, according to the IRS count. They will automatically receive more than $1.2 billion in refunds or credits.

The IRS says many of these payments will be completed by the end of September.

Again, note the automatic designation. Eligible taxpayers don't need apply for it or, as the agency's commissioner specifically notes in the announcement, call the IRS to get the penalty relief.

Where penalties have already been assessed, they will be abated. If you've already paid a penalty that's now eligible for relief, the IRS will send you a refund or credit your taxpayer account.

Qualifying relief circumstances: IRS Notice 2022-36 details the automatic failure to file relief situations. This non-filing penalty typically is assessed at a rate of 5 percent per month, and could come to up to 25 percent of the unpaid tax when a federal income tax return is filed late.

In general, the relief applies to certain taxpayers facing certain failure to file penalties and certain international information return (IIR) penalties in connection with tax year 2019 and 2020 returns that are filed on or before Sept. 30, 2022.

The penalty relief also applies to certain information return for tax year 2019 that were filed on or before Aug. 1, 2020, as well as tax year 2020 returns that were filed on or before Aug. 1, 2021.

The 1040 series forms affected by this relief and cited in Notice 2022-36 include —

  • Form 1040, U.S. Individual Income Tax Return;
  • Form 1040-C, U.S. Departing Alien Income Tax Return;
  • Form 1040-NR, U.S. Nonresident Alien Income Tax Return;
  • Form 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents;
  • Form 1040 (PR), Federal Self-Employment Contribution Statement for Residents of Puerto Rico;
  • Form 1040-SR, U.S. Tax Return for Seniors; and Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico).

In addition, relief also applies to qualified filings of —

  • Form 1041, U.S. Income Tax Return for Estates and Trusts;
  • Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts;
  • Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts;
  • Form 1120, U.S. Corporation Income Tax Return;
  • Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
  • Form 1120-F, U.S. Income Tax Return of a Foreign Corporation;
  • Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;
  • Form 1120-H, U.S. Income Tax Return for Homeowners Associations;
  • Form 1120-L, U.S. Life Insurance Company Income Tax Return;
  • Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;
  • Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;
  • Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations;
  • Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
  • Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;
  • Form 1120- SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);
  • Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return;
  • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and
  • Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)).

A variety of federal information returns that are required of banks, employers and other businesses also are covered under this penalty relief. The types and deadlines are listed in the notice.

Again, in all applicable cases, the IRS says the relevant penalties will be waived or, to the extent previously assessed, will be abated, refunded, or credited to eligible taxpayers' accounts.

Where penalties still apply: While this IRS penalty relief decision will help many taxpayers, the IRS notes there still are some situations where penalties still will apply.

These include, for example, situations where a fraudulent return was filed; where the penalties are part of an accepted offer in compromise or a closing agreement; or where the penalties were finally determined by a court.

Also, other penalties, such as the failure to pay penalty, are not eligible for this relief. However, notes the IRS, taxpayers still can use existing penalty relief procedures, such as applying for relief under the reasonable cause criteria or the first-time abatement program. Details on these options are available at the IRS.gov penalty relief page.

Relief for filers, IRS alike: "Penalty relief is a complex issue for the IRS to administer," said IRS Commissioner Charles Rettig in announcing the penalty relief. "We've been working on this initiative for months following concerns we've heard from taxpayers, the tax community and others, including Congress. This is another major step to help taxpayers, and we encourage those affected by this to review the guidelines."

The move also is good for the tax agency. The IRS says the decision will allow it to focus its resources on processing backlogged tax returns and taxpayer correspondence.

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