IRS Penalty Relief Coming

Another reminder to taxpayers to avoid a potential surprise.

In the height of the pandemic, the IRS temporarily suspended a multitude of automated tax notices, including reminders for past-due balances and collection notices. What may not have been clear to all taxpayers was the fact that failure to pay penalties continued to accrue for those with balances that were still unpaid.

The temporary suspension of notices has since been lifted and as of last month, notices were resuming catching some taxpayers off guard that may have forgotten about these balances from 2020 and 2021 after not receiving a notice for more than a year.

In light of the unusual circumstances, the IRS is issuing over $1 billion in relief to help address these liabilities gradually. New notice LT38 Reminder, Notice Resumption will begin being sent to taxpayers starting next month to resume the collection process in a less aggressive way. Notice LT38 will include the taxpayers’ current liability but always different ways to pay as well as any applied penalty relief if applicable to the case.

The IRS specifically announces that it will be actively working to determine where they are able to waive failure to pay penalties and anticipate that the relief effort will affect over 5 million returns. The waive of application of relief will be extended to individual accounts first, followed by businesses, and then trusts and estates. The whole process is not expected to be completed until March of next year.

When discussing with your tax clients, key points to know is that the penalty relief is automatic, and no specific requests or forms are required to be filed. If your client is eligible, their relief will be applied to their account and noted on the notice they receive.

If a taxpayer has already paid failure to file penalties related to 2020 or 2021 and it is later determined that the individual was eligible for relief, the IRS will issue refunds starting in January. If there are questions, however, the IRS will not be taking them until after March 31st, presumably after the amounts are all determined and applied to accounts.

Taxpayers who do not receive automatic relief may still consider the first-time abatement program if needed to address their penalties. It is recommended that you consider this program carefully with your clients given its limited use.