Don't Mess With Taxes

Most of us are wrapping up year-end tax tasks (in between wrapping presents!). Others, and there is some overlap, are getting ready for the New Year and the start of the 2024 tax filing season.

And some of us are still dealing with 2020 and 2021 tax issues.

In many of these years-old cases, the issue is tax penalties assessed during the COVID-19 pandemic chaos that affected normal tax filing and processing.

Today, the Internal Revenue Service announced it is providing $1 billion in penalty relief to those taxpayers, who number around 4.7 million.

The relief receiving taxpayers include individuals, businesses, and tax-exempt organizations who owe back taxes, but were not sent automated collection reminder notices during the pandemic.

Avoiding a penalty amount surprise: The taxpayers who now are getting COVID-related penalty relief originally were notified by the IRS of their unpaid tax balances. But as the coronavirus pandemic wreaked unprecedented havoc across the country, the U.S. tax system became another one of its victims.

The IRS temporarily suspended the mailing of automated reminders to pay overdue tax bills starting in February 2022. And although these reminder notices were suspended, the failure-to-pay penalty continued to accrue for the taxpayers who did not fully pay their bills in response to the initial balance due notice.

Without the IRS' regular notice nudging, many of these owing taxpayers didn't realize just how much the growing failure-to-pay penalty charges increased what they owe. The failure-to-file penalty is usually 5 percent of the tax owed for each month or part of a month that the tax return is late, up to 25 percent.

In addition, the IRS is required by law to charge interest when a tax balance is not paid on time. Interest is based on the amount of tax owed for each day it's not paid in full, is compounded daily, and cannot be reduced due to reasonable cause.

"As the IRS has been preparing to return to normal collection mailings, we have been concerned about taxpayers who haven't heard from us in a while suddenly getting a larger tax bill. The IRS should be looking out for taxpayers, and this penalty relief is a common-sense approach to help people in this situation," said IRS Commissioner Danny Werfel.

So the agency decided to abate those penalties to the tune of $1 billion in relief.

Overall, says the IRS, most of affected filers make less than $400,000 a year. In the individual taxpayer category, nearly 70 percent of those who will get the penalty relief have income of less than $100,000 per year.

Penalty waiver timing: Starting next month, the IRS will issue a special reminder letter to the taxpayers getting the COVID-related relief. The letter will alert the taxpayer of their liability, ways to pay, and, where applicable, the amount of penalty relief they are receiving.

IRS Notice 2024-7 has the details on how the agency is providing failure-to-pay penalty relief to eligible taxpayers affected by the COVID-19 pandemic to help them meet their federal tax obligations. Here, however, is an overview of how the IRS says the relief process will work.

Of key interest to the affected taxpayers is that the penalty relief is automatic. Eligible relief recipients don't need to take any action to get it.

The IRS will adjust eligible individual accounts first. It will follow that with modifications to business accounts. The individual and business account penalty relief changes will take place in late December to early January.

Trusts, estates, and tax-exempt organizations adjustments will occur in late February to early March 2024.

Refunds for some receiving relief: Then there are the taxpayers who are eligible for the penalty relief, but who already paid their full balance, including penalty charges related to their 2020 and 2021 taxes. They also will be getting a break.

In these cases, says the IRS, the penalty-paying taxpayers will get a tax refund of the amount they paid, or have it credited toward another outstanding tax liability.

The IRS will send the first round of penalty-relief-prompted refunds starting now through January 2024. Affected taxpayers can see any credit created by the penalty relief by viewing their tax transcript.

If a taxpayer does not receive a refund, a special reminder notice may be sent with their updated balance beginning in early 2024. Taxpayers with questions on penalty relief can contact the IRS after March 31, 2024.

Tax due limits relief: Finally, there is a relief limit based on the amount of tax due.

The penalty relief only applies to eligible taxpayers with assessed tax of less than $100,000 for filings of Forms 1040, 1120, 1041 or 990-T income tax returns for tax years 2020 or 2021. The taxpayers also must be in the IRS collection notice process.

The IRS notes the $100,000 tax liability limit applies separately to each return and each entity.

The relief also applies to those who were issued an initial balance due notice between Feb. 5, 2022, and Dec. 7, 2023.

And on April 1, 2024, the IRS notes that the failure-to-pay penalty will resume on tax due from taxpayers eligible for this special pandemic relief.

Paying due taxes: While the penalty amount is erased, taxpayers still need to pay their due tax. The IRS offers several payment options and online tools to do that.

Among the online tools is the IRS Document Upload Tool, improved phone service with callback features, and the addition of bots that can answer simple questions, set up or modify a payment plan and request a transcript.

The IRS also encourages taxpayers to get an IRS Online Account, where they can see information about an unpaid tax bill or apply for an online payment plan.

Back to normal notices: With the COVID-affected 2020 and 2021 filings taken care of, the IRS will resume sending collection notices in January 2024.

The automated collection notices and letters will go to individuals with tax debts prior to tax year 2022, and to businesses, tax exempt organizations, trusts, and estates with tax debts prior to 2023, with exceptions for those with existing debt in multiple years.

These notices and letters were previously paused due to the pandemic and the historic processing backlog it created at IRS facilities.

This is the latest step in a return to normal IRS business that began this fall. These automated collection notices were sent to current tax year 2022 individual and third quarter 2023 business taxpayers.

The IRS also noted that the COVID collection mailing pause applied only to follow-up reminders. The agency continued to send first, or initial, balance due notices, such as CP14 and CP161 notices, to taxpayers during the pandemic.

Special notice for old tax debts: The follow-up mailing hiatus meant some taxpayers who have long-standing tax debt have not received a formal letter or notice from the IRS in more than a year. To help taxpayers in this category as the agency's normal processes resume, the IRS next month will send them a special reminder letter.

This reminder letter will alert the taxpayer of the liability and will direct them to contact the IRS or make alternative arrangements to resolve the bill. Tax professionals and taxpayers will see these reminder letters in the form of letter LT38, Reminder, Notice Resumption.

Following the reminder mailing, taxpayers with old, unresolved tax issues will receive the next notice, informing them of a more serious step in the tax collection process.

The IRS says it will issue these balance due notices and letters in gradual stages next year to ensure taxpayers who have questions or need help are able to reach an IRS assistor. This will also provide additional time for tax professionals assisting taxpayers.

You also might find these items of interest:

• Options if you can't pay your tax bill in full
• File (and pay) your taxes on time or face penalties
• Don't ignore that IRS letter and nine other tax notice tips
• Tax penalties, some increased in 2024 for inflation, could add to what you owe Uncle Sam

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