IRS Provides Much-Needed Penalty Relief to Individuals and Businesses who Struggled to Make Payments during the Pandemic

The IRS recently announced penalty relief for certain individuals and businesses who were assessed the failure to pay penalty with respect to certain income tax returns for tax years 2020 and 2021¹. The penalty will be waived, or if already assessed, will be abated. If taxpayers already paid the penalty, it will be refunded or credited to other outstanding tax liabilities².

Penalties Eligible for this Relief

This relief applies to the failure-to-pay penalty assessed under IRC §6651(a)(2) or §6651(a)(3), which generally charges a 0.5% penalty per month (or fraction of a month) for any unpaid amount due either shown on the tax return³ or later assessed by the IRS⁴. 

Penalties assessed or accrued within the “relief period” qualify for waiver or abatement. This “relief period” begins on the date the IRS issued an initial balance due notice to eligible taxpayers, or February 5, 2022, whichever is later, and ends on March 31, 2024. Eligible taxpayers will remain liable for any addition to tax for the failure to pay tax that accrued before or after the relief period⁵.

Note that while this relief applies to penalties, it does not apply to interest charged on unpaid amounts⁶. 

Taxpayers Eligible for this Relief

The penalty relief applies to taxpayers meeting three requirements⁷:

1. Taxpayers whose assessed income tax for tax year 2020 or 2021, as of December 7, 2023, is less than $100,000 (excluding any applicable penalties, interest, or other additions to tax); 
2. Taxpayers was issued an initial balance due notice on or before December 7, 2023 for tax year 2020 or 2021; and
3. Taxpayer is otherwise liable during the relief period for accruals of the failure to pay penalties under §6651(a)(2) or §6651(a)(3) with respect to an eligible return for tax year 2020 or 2021. 

Eligible Returns for Individuals⁸:

• 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-PR, Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia 
• Form 1040-SR, U.S. Tax Return for Seniors 
• Form 1040-SS, U.S. Self-Employment Tax Return

Eligible Returns for Businesses, Trusts, Estates, and Tax-Exempt Organizations⁹:

• 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 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-S, U.S. Income Tax Return for an S Corporation 
• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B) 
• 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 990-T, Exempt Organization Business Income Tax Return

If the taxpayer qualifies, the IRS will automatically waive or abate the penalties and will issue a notice to the taxpayer reflecting the updated amount owed and any refund or credit granted¹⁰. Although the IRS indicated the abatement will be automatic, we encourage taxpayers to obtain their account transcripts to ensure this abatement actually occurred.

For those who are not eligible for this relief, there may still be penalty abatement eligibility available through alternative methods. If you have questions about whether you or your business is eligible for penalty relief, contact our team today at (410 497-5947 or schedule a confidential consultation here.