IRS to provide automatic penalty relief to eligible taxpayers

ARTICLE | December 21, 2023

Authored by RSM US LLP

Executive summary

The IRS announced plans to provide automatic penalty relief for failure to pay penalties incurred in tax years 2020 and 2021 on income tax obligations. Eligible taxpayers include individuals, businesses, trusts, estates and tax-exempt organizations that meet certain qualifying criteria. The IRS is taking this step in tandem with the resumption of mailing automated notices of amounts due which had been temporarily suspended during the COVID-19 pandemic.

Millions of taxpayers will receive penalty relief for failure to pay penalties

The IRS announced a plan to relieve certain eligible taxpayers of failure to pay penalties incurred with respect to the taxpayers’ 2020 and 2021 income tax returns. The plan will provide automatic relief of about $1 billion in penalty assessments to approximately 4.7 million individuals, businesses and tax-exempt organizations that may not have received automated collection reminders during the COVID-19 pandemic. The relief has already been provided to eligible individual taxpayer accounts and will be provided to business accounts beginning in late December 2023. Relief will be granted to eligible trusts, estates, and exempt organizations in late February through March 2024. Taxpayers do not need to take any action to obtain the relief; it will automatically apply to eligible taxpayer accounts. Notice 2024-7 provides details about the relief including eligible taxpayers, eligible returns, the relief period and exceptions.

In February 2022, the IRS imposed a moratorium on mailing certain automated collection notices—except initial balance due notices—while it worked through a backlog of original and amended returns. The planned penalty relief is being provided to assist those who were not sent automated collection notices since February 2022, during which time the failure to pay penalties were continuing to accrue. The IRS will resume issuing automated reminder notices beginning in 2024 for balances due for taxable years 2021 and earlier.

The IRS will issue a special reminder letter starting next month that will alert taxpayers of outstanding liability, easy ways to pay and the amount of penalty relief they received, if applied. If the automatic relief results in a refund or credit rather than abatement of outstanding penalties, taxpayers will be able to determine whether they received automatic relief by checking their tax transcript.

Eligibility for Automatic Penalty Relief

Eligible Taxpayers

A taxpayer is eligible for automatic relief if the taxpayer:

1. Has assessed income tax of less than $100,000 (on a per-return, per-entity basis) for the 2020 or 2021 tax year as of Dec. 7, 2023, excluding any applicable additions to tax, penalties or interest;
2. Was issued an initial balance due notice on or before Dec. 7, 2023, for taxable year 2020 or 2021; and
3. Is otherwise liable during the “relief period” for accruals or additions to tax for the failure to pay penalty under section 6651(a)(2) or 6651(a)(3) with respect to an eligible return for taxable year 2020 or 2021.

The “relief period” is the period that begins on the date the IRS issued an initial balance due notice to an eligible taxpayer, or Feb. 5, 2022, whichever is later, and ends on March 31, 2024. Eligible taxpayers will still be liable for any failure to pay Eligible Tax Returns penalty that accrued before or after the relief period. Interest will continue to accrue during the relief period and eligible taxpayers are still liable for the accrued interest. The failure to pay penalty will resume on April 1, 2024, for taxpayers eligible for relief.

Eligible Tax Returns

The relief will automatically apply to taxpayers who meet the above criteria and who filed one of the following eligible returns:

Individuals

• 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 

Trusts, Estates, Certain Taxable Corporations and Certain Tax-Exempt Organizations

• 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 T
• 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

The automatic relief does not apply to any return for which the penalty for fraudulent failure to file under Section 6651(f) or the penalty for fraud under Section 6663 applies. The relief is also inapplicable to any failure to pay penalty in an offer in compromise that is accepted by the IRS. Lastly, the relief does not apply to any penalty for the failure to pay that is settled in a closing agreement under or finally determined in a judicial proceeding.

Taxpayers who meet the above criteria should be on the lookout for an IRS letter which details the amount of penalty relief that was applied to their account.