The Treasury Department and the IRS recently granted relief from various failure to file penalties imposed under the Internal Revenue Code for the 2019 and 2020 tax years.

Notice 2022-36 (Notice) grants automatic penalty relief on late filed 2019- and 2020-income tax and information returns filed between August 2022 and 30 September 2022. It did not extend to the Foreign Bank Account Report (FBAR), which is not governed by the Internal Revenue Code, but rather by the Bank Secrecy Act.

Set out in the Notice are the following penalty-imposing sections of the Internal Revenue Code to which the relief is granted for the above-mentioned years.

  • 6651(a)(1) 5 percent late filing penalty is imposed for each month or part of the month for which a return is late. The penalty is based on the federal income tax due and payable on the return.
  • 6038 late filing penalty for the failure of certain United States persons to furnish certain information with respect to a controlled foreign corporation or a controlled foreign partnership p that the person owns.
  • 6038A(d) late filing penalty is imposed on a 25%-foreign owned domestic corporation or wholly foreign-owned domestic disregarded entity’s failure to furnish certain information.
  • 6038C(c) imposes a penalty on a foreign corporation engaged in a United States trade or business for the failure to furnish (on or before the date prescribed) certain information or the failure to maintain certain records.
  • 6039F(c) imposes a penalty on a United States person for the failure to furnish (on or before the date prescribed) certain information with respect to the receipt of large gifts or bequests from foreign persons.
  • 6677 imposes a penalty on the failure to file a notice or return required to report transactions with or ownership of a foreign trust.
  • 6698(a)(1) generally imposes a penalty for the failure of any partnership to file the return required under section 6031.
  • 6699(a)(1) generally imposes a penalty for the failure of any Subchapter S corporation to file a return required under section 6037.
  • 6721(a)(2)(A) generally imposes a penalty for the failure to file an information return on or before the required filing date.

The Notice states that “the foregoing penalties do not apply if the taxpayer can show that the failure to timely file the return or to furnish the required information or to provide the required notice, as applicable, is due to reasonable cause”.

As mentioned above, the first category of penalty, the § 6651(a)(1) penalty, is based on the amount of tax payable. Other types of failure to file penalties are based on the amount of gross assets in an entity held by the United States person with some penalties set at a minimum of U.S. $10,000. § 6651(a)(1) penalties are generally less severe than other types of penalties. However, this will vary on a case-by-case basis.

Section 6651(a)(1) generally imposes a penalty of 5 percent of the net tax due per month with an additional 5 percent for each additional month or fraction thereof, not exceeding 25% in total. Exceptions exist for estimated tax, covered under § 6651, and if fraud is involved, the penalty is 15% per month, not exceeding 75% in total. Taxpayers filing a United States federal income tax return with no tax due do not get penalties imposed.

The Notice [1], released on August 24, 2022, by the Department of the Treasury and the Internal Revenue Service, specifies which income tax returns are eligible for relief.  The majority of these are listed below. Taxpayers had to file one of the following 2019 or 2020 tax returns by 30 September 2022 to obtain relief from late filing penalties.

Form 1040 U.S. Individual Income Tax Return, Form 1040-NR U.S. Non-Resident Alien Income Tax Return, Form 1040-NR-EZ U.S. income Tax Return for Certain Non-resident Aliens with No Dependents, Form 1040-SR, U.S. tax return for Seniors, Form 1040SS, US. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico).

Form 1041 U.S. Income Tax Return for Estates and Trust, Form 1120 U.S. Corporation Income Tax Return, Form 1120-F U.S. Income Tax return of a Foreign Corporation, Form 3520 Annual Return to Report Transactions with foreign Trusts and Receipt of Certain Foreign Gifts, Annual Information Return of Foreign trust With a U.S. Owner.

Relatively short at only six pages long, the Notice is one of the more recent tax relief packages brought in due to the COVID-19 pandemic.

In practice, taxpayers were presented with a narrow window of opportunity to take avail of the relief. Consequently, whilst the move has been welcomed by the AICPA, the organization has responded swiftly by urging the IRS to provide more time for taxpayers to claim the relief.

“We thought carefully about the type of penalties, the period covered, and the duration before granting this penalty relief. We understand the concerns being raised by the tax community and others about the September 30 penalty relief deadline” -.IRS Commissioner Chuck Rettig, September 2022.

The AICPA wants the IRS and the Department of the Treasury to extend the timeframe for penalty relief to 31 December 2022, clarify the application of the relief, and extend the applicability.

“With the Delta and Omicron variants of COVID 19 many taxpayers continued to experience the harmful effects of the pandemic in 2021 and into 2022[2]”.

The AICPA responded to the Notice with a letter to the IRS on August 30, 2022, requesting an extension of the provisions in the Notice through to December 31, 2022.

A more detailed letter followed a week later. The AICPA’s September 8, 2022, letter to the Treasury and the IRS contained a request that 2016, 2018 and 2021 years be granted the relief. Requests for clarity around the application of the Notice to various situations taxpayers face are also included.

“We request that the deadline of September 30, 2022, be extended to December 31, 2022. The business cycle of the tax profession is filled with upcoming deadlines (September 15 deadline for pass-throughs, September 30 for trusts, and October 15 for individuals and corporations) and inserting a September 30 deadline into this mix creates an insurmountable burden for most practitioners and taxpayers. Additionally, given the complex facts often associated with international information reporting and that many affected taxpayers live abroad, the September 30 deadline is unrealistic and will fail to promote a critical mass of impacted taxpayers to avail themselves of the benefits of the Notice. Extending the deadline will assist the practitioner community in maximizing the relief provided and will bring more taxpayers into voluntary compliance. In turn, such voluntary compliance will save the IRS resources”.

The relief applies to taxpayers who have not filed and to those who had filed and paid a penalty.  Current estimates indicate that the IRS has issued US $1.2 billion in refunds and credits under the Notice.

The relief extends to the failure to file penalty only; the § 6651(a)(2) failure to pay penalty still applies[3].

Taxpayers filing a return covered under the Notice after September 30th, 2022, still have some relief available. The specific penalties mentioned in the Notice, otherwise applicable to the returns also stated in the Notice will only be imposed from 1 October 2022, and not the original due date of the return.

The key elements of the September 2022 letter included:

  1. A request to expand the scope of relief to include taxpayers in various stages of the penalty process. This includes taxpayers at both the examination appeals and collection appeals stages of the process. The AICPA propose that IRS Exam Revenue Agents also should thoroughly consider the principles set forth in Notice 2022-36 when considering penalties.

The AICPA observes that the Notice’s penalty relief is driven by the IRS’ ability to identify taxpayers who have filed late. A request for relief to Include non-automatically assessed penalties is recommended by the AICPA.

The AICPA also wants the IRS to include amended returns, which are not mentioned in the Notice, and all international information returns, including delinquent international information return submission procedures.

  1. A request to expand the scope of relief to late payment penalties and additional returns.

Grounds for this request include that the IRS has a backlog of unopened mail and that employees make errors by processing payments as received when the envelopes were opened or received instead of the date the envelope was mailed.

  1. A request for clarification as to whether taxpayers will still be eligible for relief under the First Time Abatement (FTA) procedures[4] pursuant to obtaining relief under Notice 2022-36.
  1. A request to proactively notify taxpayers that they qualify for relief versus waiting for the taxpayer to come forwards.

More recently, on September 28, 2022, the AICPA praised the bicameral letter to the IRS from the U.S. Senate Finance Committee and U.S. House Ways and Means Committee pressing the IRS to extend Notice 2022-36 penalty relief to late November 2022.

The AICPA is the world’s largest member association representing the CPA profession, with more than 421,000 members in the United States and worldwide, and a history of serving the public interest since 1887. The AICPA is an excellent advocator for taxpayers and tax practitioners. It regularly writes to the IRS and has been instrumental in obtaining tax relief during the pandemic years.

The AICPA makes regular submissions to the IRS on all matters tax-related and since 2020 has called on the IRS to provide relief in many areas of U.S. taxation. 

Members advise clients on federal, state, and international tax matters and prepare income and other tax returns for millions of Americans and provide services to individuals, not for profit organizations, small and medium sized businesses, as well as America’s largest businesses.

NZ US Tax Specialists Ltd are an International Associate of the AICPA.

[1] Notice 2022-36 Penalty Relief for Certain Taxpayers Filing Returns for Taxable Years 2019 and 2020.

[2] Journal of Accountancy: AICPA asks IRS to expand penalty relief, Bonner, P. September 10, 2022.

[3] At 0.5% per month up to total of 25%.

[4] Longstanding relief available from failure-to-file, failure-to-pay or failure-to-deposit penalties.