When the 2020 coronavirus pandemic hit, it turned tax season upside down for accountants and tax professionals alike. To make up for the often-inevitable mistakes, delays, and missed deadlines that many taxpayers have experienced over the past few years, the Internal Revenue Service announced last week that it would increase more than $1.2 billion in penalties for late filing of tax returns in the US years 2020 and 2021 would be reimbursed.
This refund applies to forms for tax years 2019 and 2020. Refunds are expected to arrive by the end of September, according to the IRS.
“The simplification issued today is another way the agency is helping people during this unprecedented time,” IRS Commissioner Chuck Rettig said in a press release. “This penalty relief will automatically apply to individuals or entities that qualify; there’s no need to call.”
While the IRS is positioning the penalty reductions as a way to help Americans, tax experts say it may be motivated by something else. “The IRS lags behind with all its mail,” says Candace Varner, chief tax officer at Kansas City wealth management firm Creative Planning Inc. Eliminating these late filing penalties could help reduce some of the backlog.
Regardless of the reason, 1.6 million taxpayers will get this bonus refund next month. Here’s how to tell if you’re in line to get some of that money from the IRS.
What late filing fees are refunded?
The IRS offers “penalty relief” for those who were late in filing certain forms for tax year 2019 and tax year 2020. Forms for these years were due in 2020 and 2021 respectively.
The late filing fee for the following forms from these years will be waived or refunded:
- Income tax forms for individuals, businesses, and estates, including but not limited to Form 1040, Form 1120, Form 1065, and Form 990.
- Information returns such as 1099 forms required by certain companies.
To be eligible for late 1099 penalty waivers, businesses must have submitted forms by August 1, 2020 for 2019 returns or August 2, 2021 for 2020 returns.
However, the window is still open for individuals and businesses to file their income tax returns and waive late filing fees. “As long as they file by the end of September (2022), they will not face any penalties,” said Michael Greenwald, partner and corporate tax director at accounting firm Friedman LLP in New York City.
This refund only applies to the late filing fee – which can be up to 25% of the federal tax owed. Other fees paid do not qualify for this refund.
“Failure to pay the penalty will not be forgiven,” says Logan Allec, CPA and owner of tax relief company Choice Tax Relief.
How do I get my refund?
The refund process is automatic. “The IRS would prefer that you not contact them,” says Greenwald.
Those who have been assessed a qualifying late filing penalty but have not paid it will have it reduced. Meanwhile, those who paid the qualifying fee should receive a refund by the end of September, according to the IRS.
While the IRS didn’t specify how those refunds would be issued, Varner says the agency has issued direct deposits for other initiatives like child tax advances when it has a taxpayer’s account information.
What if I am not eligible for a late filing penalty refund?
There are some cases where a taxpayer may not be entitled to a refund, e.g. B. in cases where a fraudulent tax return was filed or the penalty was included in a tax settlement offer.
In addition, the late payment penalty will only be waived for the 2019 and 2020 tax years. If you were late with a previous year’s tax return or didn’t get an extension this year and haven’t yet filed your 2021 tax return, you may still owe a fee.
Allec says there are two other ways taxpayers can get penalty relief:
- First weaning: If you complied three years prior to the tax year in which you received the penalty — that is, filed the same return on time and without penalty — Allec says you can apply for a first-time reduction. This administrative waiver may be applied to non-filing, non-payment and non-deposit of fees.
- Appropriate reason: If you are not eligible for a first-time discount, you can request a valid reason fee waiver. Reasonable reason may be illness, death or natural disaster, but do not trust a tax professional to file a claim for you.
Why does the IRS award penalties for late filings?
Allec said tax attorney organizations and some members of Congress have been pushing for sentence relief, but he says the IRS also likely recognized that the COVID-19 pandemic has set the stage for people to apply for sentence relief. “You can imagine how many reasonable requests they’re going to get,” he says.
The pandemic was particularly disruptive to the 2020 and 2021 tax seasons, when tax returns for 2019 and 2020 were due. “In these years that we’re talking about, the (application) deadlines have changed more than once,” says Varner. “It was very confusing for people.”
Waiving these penalties could be a win-win for both taxpayers and the IRS. “Collecting fines takes a lot of work,” says Greenwald. Since many late filing penalties are not significant, it may not be worth collecting them. By lifting these penalties, the government may be able to clear some of its backlog and deal with future correspondence and other paperwork in a more timely manner.
Greenwald notes, “We in the professional (tax) community hope that this will be the first step for the IRS to dig out of the hole they are in.”
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