The IRS is currently implementing a $1 billion penalty relief program to support certain taxpayers who were adversely affected by the IRS’s operational difficulties during the pandemic.
In 2022, the IRS had to suspend its automated reminder system for overdue tax bills due to staffing issues and processing backlogs. As a result, roughly 4.7 million taxpayers were not sent automated collection reminders. While the suspension did not impact the initial balance-due notices, like the CP14 and CP161 notices, taxpayers did not receive follow-up notices reminding them of unpaid taxes. Despite the suspension of the reminder system, the failure-to-pay penalties continued to accrue for taxpayers who had not fully paid their taxes due.
Understanding the IRS penalty relief program
In response to the unique circumstances that left many taxpayers without follow-up notices for over a year, the IRS has implemented a proactive relief program for those who may suddenly find themselves facing significant unpaid tax bills.
The program will specifically impact individuals, businesses, trusts, estates, and tax-exempt organizations that filed Forms 1040, 1120, 1041, and 990-T income tax returns for tax years 2020 or 2021.
As the IRS resumes normal operations, it has started issuing special reminder letters (LT38, Reminder, Notice Resumption) to alert taxpayers of their liabilities from 2020 and 2021. The letter will notify taxpayers of their outstanding bills and guide them to reach out to the IRS or make arrangements to resolve the unpaid taxes.
As part of the penalty relief program, the IRS is waiving failure-to-pay penalties for eligible taxpayers affected by this situation. To qualify, taxpayers must owe less than $100,000 per year for the 2020 and 2021 tax years. This $100,000 limit applies independently to each return and each entity.
The relief program is expected to impact around 5 million tax returns, resulting in an average relief of $206 per return.
Relief is automatic
In an effort to streamline the process, the IRS has confirmed that eligible taxpayers will not need to apply for the relief. If you’ve already made payments toward failure-to-pay penalties for 2020 and 2021, the IRS will either issue a refund or credit the payment toward any outstanding tax liability.
The IRS has already started the first round of refunds and will continue this process over the upcoming months. If you believe you qualify for relief and have not received a notice or refund yet, there is nothing you need to do at this time. The IRS is carrying out this process in rounds. They started with adjustments to eligible individual accounts, followed by business accounts. Adjustments for trust, estates, and tax-exempt organization accounts are expected throughout March 2024.
For those taxpayers who do not receive a refund, the IRS will send a special reminder notice. This notice will provide updated tax liabilities and outline payment options. Taxpayers who have questions regarding the penalty relief can reach out to the IRS after March 31, 2024.
Next steps
As the IRS resumes its standard collection practices, taxpayers should be prepared for a return to regular procedures. The failure-to-pay penalty will resume on April 1, 2024, for taxpayers who were eligible for relief but have not paid their outstanding balance.
For a more in-depth understanding of the IRS’s penalty relief program or personalized advice on the matter, please contact our office for support.