By Kelly Hanley, Esq.
In an unprecedented move to alleviate the financial strain caused by the COVID-19 pandemic, the Internal Revenue Service (IRS) has announced a significant penalty relief initiative. This initiative aims to aid approximately 4.7 million individuals, businesses, and tax-exempt organizations who faced challenges in meeting their tax obligations during the pandemic. The IRS’s decision to provide this relief and to resume normal collection procedures in 2024 marks a significant shift in the tax landscape as we enter post-pandemic recovery.
Background of the Penalty Relief
During the height of the COVID-19 pandemic, the IRS had temporarily suspended the mailing of automated collection reminder notices. This suspension, starting in February 2022, was a response to the extraordinary circumstances taxpayers faced. However, despite the suspension of these reminders, the failure-to-pay penalties continued to accumulate for those who could not fully settle their tax bills.
Recognizing the unique challenges posed by the pandemic, the IRS is now stepping up to offer considerable relief. Approximately 4.7 million taxpayers, most of whom earn under $400,000 annually, stand to benefit from this decision. The relief totals around $1 billion, averaging about $206 per return.
Eligibility for Penalty Relief
The IRS’s relief program is targeted at taxpayers who faced difficulties during the specific tax years of 2020 and 2021. To be eligible for this penalty relief, taxpayers must meet specific criteria:
- Assessed income tax for 2020 or 2021 must be less than $100,000, excluding penalties or interest.
- They must have received an initial balance due notice between February 5, 2022, and December 7, 2023.
- The relief applies to various tax forms, including Forms 1040, 1120, 1041, and 990-T.
Importantly, this relief is automatic. Taxpayers do not need to take any additional steps to benefit from it. Those who have already paid their penalties for the relevant years will receive refunds or credits toward other tax liabilities.
Resumption of Collection Notices
As we approach 2024, the IRS is preparing to resume its standard collection procedures. This resumption signifies a return to pre-pandemic norms and is a clear indication that the IRS expects taxpayers to regularize their tax affairs. However, the IRS is cognizant of the potential shock this might cause to those who haven’t received notices in a long while. As such, they are taking measures to ease this transition.
One such measure is the issuance of special reminder letters. These letters are designed to inform taxpayers of their liabilities, available payment options, and the extent of the penalty relief they have received. The IRS emphasizes the importance of these letters as a precursor to more stringent collection steps that may follow if liabilities remain unresolved.
Options for Taxpayers with Unresolved Tax Debt
The IRS is keen on offering assistance to taxpayers who might still be struggling with unpaid tax debts. For those not eligible for the automatic penalty relief, other options are available. These include applying for relief under reasonable cause criteria or the First-Time Abatement program. Additionally, the IRS has enhanced its online tools and services to facilitate easier resolution of tax issues. These include the IRS Document Upload Tool, improved phone services, and the establishment of an IRS Online Account for easier management of tax obligations.
Understanding Penalties and Interest
Be sure to understand the implications of penalties and interest on your unpaid taxes. The failure-to-file penalty, typically 5 percent of the tax owed per month, can accrue up to 25 percent. Similarly, the failure-to-pay penalty is triggered if taxes aren’t settled in time. The IRS is mandated by law to charge interest on unpaid taxes, which compounds daily. These penalties underscore the importance of staying abreast of tax obligations and utilizing available relief options where necessary.
The IRS’s decision to offer penalty relief is a welcome development for millions of taxpayers affected by the pandemic. It reflects an understanding of the extraordinary circumstances faced by individuals and businesses during this period. As the IRS moves towards the resumption of standard collection procedures, you need to be aware of your obligations, the available relief options, and the tools at your disposal to manage your tax affairs effectively.
This penalty relief and the resumption of normal collection activities signal a return to normalcy in the tax world. Taxpayers should take this opportunity to regularize their tax status, explore available relief options, and prepare for the future.
Call me or one of my experienced tax attorneys if you need help with your tax situation. The initial consultation is free. 312-345-5440.