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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

COVID Late Filing Penalty Relief – What to Know

Within the last few weeks, and "to help struggling taxpayers affected by the COVID-19 pandemic", the IRS issued late filing penalty relief for most taxpayers who filed 2019 or 2020 tax returns late. This penalty relief also may apply to returns still to be filed for those years.

"Throughout the pandemic, the IRS has worked hard to support the nation and provide relief to people in many different ways," IRS Commissioner Chuck Rettig stated in the notice announcing the relief. "The penalty relief issued today is yet another way the agency is supporting people during this unprecedented time. This penalty relief will be automatic for people or businesses who qualify; there's no need to call."

The relief applies only to the late filing penalty, a quite onerous penalty typically assessed at the rate of 5% per month of the unpaid tax balance, up to a total of 25%. The relief is broad based, as it applies to income tax returns filed by individuals, corporations, and partnerships, as well as estates and trusts.

Unfortunately, the late payment penalty was not included in this present round of relief. That penalty, which can be imposed on top of the late filing penalty in normal circumstances, is .5% of the unpaid balance per month. Interest on the unpaid balance is also normally charged, and those rates change quarterly. The interest rate for Q3 of 2022 is 5% per annum, but is set to go to 6% for Q4.

As mentioned earlier, returns for 2019 and 2020 that are not yet filed may also qualify for the relief. The kicker, though, is that those returns must be filed on or before September 30, 2022 to qualify, so time is running short on those. 

Late filing penalty relief is not available in some situations, such as where a fraudulent return was filed, where the penalties are part of an accepted offer in compromise or a closing agreement, or where the penalties were finally determined by a court.

To its credit, the IRS is making the penalty relief automatic, meaning if you qualify, there is nothing you need to do to avail yourself of it. Unfiled tax returns filed by the September 30 drop dead rate simply will have no late filing penalty assessed. Those who have had the penalty assessed but have not yet paid it, should see it disappear from their account. 

Further, late filing penalties that have already been assessed and paid will be refunded or credited. The IRS says that nearly 1.6 million taxpayers who already paid the penalty will receive refunds totaling over $1.2 billion, and it expects to have most of these refunds issued by the end of this month.

While this relief is certainly welcome news, many tax professionals such as myself believe it doesn't go far enough, and we are pushing the IRS to do more. For example, only giving taxpayers who still need to file until September 30 really hamstrings some tax filers who need it most. 

In response, the AICPA, of which I am an almost 40-year member, has asked the IRS to change the qualifying deadline for filing late returns until December 31, 2022, to expand the years covered to include 2021, and to cover more types of penalties, such as the late payment penalty. 

Frankly, we've experienced many situations where returns were filed, payments were made, but yet penalties were still assessed. In almost every case, the returns and/or payments were lost during the pandemic shutdown, either by the postal service or at the IRS itself. Additional penalty relief would seem to be the equitable thing to do because of this.

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