Penalty Relief for Late-Filed Income Tax Returns

Notice 2022-36 provides failure-to-file penalty relief for 2019 and 2020 for the Form 1040, Individual Tax Return, Form 1120 Corporate tax return, Form 1065 Partnership Return, and Form 1120-S Subchapter S corporation return.

Failure-to-file penalties will be automatically abated for filed tax returns, and the penalty will be refunded or credited if paid. For returns not filed, the tax returns must be filed by September 30, 2022, to qualify for penalty relief. The failure-to-file penalty is generally assessed at a rate of 5% per month, up to 25% of the unpaid tax.

The IRS will also automatically abate penalties for the late filing certain foreign information returns for the 2019 and 2020 tax years. Penalty relief applies to the following forms:

• Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations
• Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
• Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 3520-A – Annual Information Return to Foreign Trusts with a U.S. Owner

The late-filing penalty for these foreign information returns is $10,000 per Form 5471 and $25,000 per Form 5472. For Forms 3520 and 3520-A, the late-filing penalty is a minimum of $10,000.

The good news is that for information returns already filed, failure-to-file penalties will automatically be abated for the penalty already paid, refunded, or credited. Remember that the information returns must be filed by September 30, 2022, to qualify for penalty relief.

Exceptions for Penalty Relief

The penalty relief offered by Notice 2022-36 is not available for penalties abated for fraudulent returns filed or where penalties are part of an accepted offer-in-compromise or closing agreement. Penalty relief also does not apply to the failure-to-pay penalty. However, taxpayers may request the penalty abated using existing procedures such as reasonable cause or the First Time Abatement program.

Taxpayers who have filed their returns do not need to take further action since the penalty relief is automatic. The deadline is around the corner for taxpayers who have not yet filed returns for 2019 or 2020. As a reminder, qualifying returns must be filed by September 30, 2022, to be eligible for penalty relief.

Our CPAs are available, and we have the knowledge, skill, and information that you need right now to address your accounting, tax, and financial needs. Contact us today.

Maria Stromple, CPA, MST
Maria is a Partner at Wilke & Associates, serving closely held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.