IRS Announces Penalty Relief for 2019, 2020 Tax Years

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Latham & Watkins Tax Controversy Practice

August 26, 2022 | Number

3003

IRS Announces Penalty Relief for 2019, 2020 Tax Years

Taxpayers must act quickly to determine if further action is necessary to obtain relief.

Delinquent returns must be filed on or before September 30, 2022.

Key Points:

•

For tax years 2019 and 2020, IRS Notice 2022-36 provides automatic relief to corporations,

partnerships, trusts, tax-exempt organizations, and individuals from certain failure-to-file penalties

and international information return (IIR) penalties.

•

Penalty relief under the Notice is automatic — meaning, generally, penalties covered by the

Notice will be abated, refunded, or credited (as appropriate) if a taxpayer has filed certain

delinquent 2019 and/or 2020 returns on or before September 30, 2022.

•

The Notice separately provides automatic penalty relief for taxpayers who filed certain 2019 and

2020 information returns by August 1, 2020, and August 1, 2021, respectively.

•

Notably, the Notice does not provide relief from penalties associated with taxpayers’ failure to file

FinCEN Form 114, a Report of Foreign Bank and Financial Accounts (FBAR), or IRS Form 8938,

Statement of Specified Foreign Financial Assets.

On August 24, 2022, the IRS released Notice 2022-36

(the Notice). The penalty relief provided in the

Notice follows a series of notices and other guidance designed to provide relief to taxpayers adversely

affected by the COVID-19 pandemic (e.g., IRS Notices 2020-17, 2020-18, and 2021-21).

This initiative

not only provides a safe harbor from certain penalties associated with coming into compliance with filing

requirements, but will also allow the IRS to better focus available resources on processing backlogged tax

returns and taxpayer correspondence.

According to the IRS, nearly 1.6 million taxpayers will automatically receive more than $1.2 billion in

refunds or credits, and most eligible taxpayers will receive their refunds by the end of September 2022.

Penalty Relief Under the Notice

Given the burdens on taxpayers to meet their filing obligations during the pandemic and the significant

backlog of IRS returns still to be processed, the IRS issued Notice 2022-36 to focus IRS resources more

efficiently and provide additional relief to taxpayers.

As summarized in the table in this Alert, the Notice

grants relief from certain failure-to-file penalties and certain IIR penalties with respect to returns for tax

years 2019 and 2020.

Latham & Watkins August 26, 2022 | Number 3003 | Page 2

Penalty relief under the Notice is automatic — meaning, generally, penalties covered by the Notice will be

abated, refunded, or credited (as appropriate) if a taxpayer has filed certain delinquent 2019 and/or 2020

returns on or before September 30, 2022. A taxpayer is not required to provide any additional

submissions or requests in order to receive the relief described in the Notice.

If the IRS already assessed the penalty, it will be automatically abated. If the penalty was already paid,

the taxpayer will receive a credit or refund. Over the coming weeks and months, the IRS will mail

standard notices to taxpayers informing them that amounts were abated, refunded, or credited (as

appropriate). According to the IRS, these notices will not specifically reference the Notice.

Penalty Relief for Information Reporting Penalties

The IRS will not impose penalties under Section 6721(a)(2)(A) for the failure to timely file an information

return (e.g., W-2s, Form 1099, Forms 1094/1095-C, etc.) depending upon when the information return

was due and when it was actually filed:

•

2019 Information Returns: To receive penalty relief, the information return must have been filed

on or before August 1, 2020, with an original due date of January 31, 2020; February 28, 2020

(if filed on paper) or March 31, 2020 (if filed electronically); or March 15, 2020.

•

2020

Information Returns: To receive penalty relief, the information return must have been filed

on or before August 1, 2021, with an original due date of January 31, 2021; February 28, 2021

(if filed on paper) or March 31, 2021 (if filed electronically); or March 15, 2021.

If a taxpayer has not yet filed these information returns, or filed them after the dates noted above, filing

them by September 30, 2022 will not qualify for relief under the Notice.

When Penalty Relief Does Not Apply

Penalty relief under the Notice is explicitly not available for:

•

any penalty not specifically identified in the Notice (e.g., penalties arising from the failure to file

an FBAR);

•

any return to which the penalty for fraudulent failure to file or fraud applies;

•

penalties in an accepted offer in compromise;

and

•

penalties settled in an IRS closing agreement or finally determined in a judicial proceeding.

Taxpayers Should Contact Legal and Tax Advisors Immediately

Penalty relief will be automatic for taxpayers who have already filed eligible delinquent returns. However,

taxpayers who have not yet filed delinquent 2019 and/or 2020 returns should promptly contact tax

counsel to discuss potential eligibility for relief under the Notice or a different IRS program. Given the

complexity of tax and information reporting penalties and the numerous pathways to penalty relief,

determining the best penalty relief strategy and preparing and filing returns can be a time and resource-

intensive exercise — so time is of the essence.

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Filings Eligible for Automatic Penalty Relief

The following table sets forth the types of filings eligible for automatic penalty relief that are filed by or with

respect to corporations, partnerships, trusts and estates, individuals, and tax-exempt organizations:

IRS Form

Applicable Penalties Absent Relief

Corporations

Form 1120,

U.S. Corporation Income Tax

Return

(including series C, F, FSC, H, L, PC,

POL, REIT, RIC, ND, and SF)

Section 6651(a)(1) Penalty

•

5% net tax liability due for the year, increasing 5% for each

additional month the failure to file continued (or fraction

thereof), up to 25% of the outstanding net tax liability due.

Form 1066,

U.S. Real Estate Mortgage

Investment Conduit (REMIC) Income Tax

Return

Form 1120-S,

U.S. Income Tax Return for an

S corporation

Section 6699(a)(1), (2) Penalties

•

$205 or $210 (depending upon the tax year) multiplied by the

number of S corporation shareholders, per month, up to 12

months.

Form 5471,

Information Return of U.S.

Persons With Respect To Certain Foreign

Corporations

(attached to a late filed Form

1120)

Section 6038 Penalty

•

$10,000 for each annual accounting period the failure

occurred. This penalty begins to increase by an additional

$10,000 for each 30-day period (or fraction thereof) following

90 days after the mailing of an IRS notice concerning the

failure. The maximum total penalty is $60,000.

Form 5472,

Information Return of a 25%

Foreign-Owned U.S. Corporation or a Foreign

Corporation Engaged in a U.S. Trade or

Business

(attached to a late filed Form 1120)

Section 6038A(d) / 6038C(c) Penalties

•

$25,000 for each taxable year the failure occurs. This penalty

begins to increase by an additional $25,000 for each 30-day

period (or fraction thereof) following 90 days after the mailing

of an IRS notice concerning the failure.

Partnerships

Form 1065,

U.S. Return of Partnership Income

Section 6698(a)(1), (a)(2) Penalties

•

$205 or $210 (depending upon the tax year) multiplied by the

number of partners, per month, up to 12 months.

Form 5471,

Information Return of U.S.

Persons With Respect To Certain Foreign

Corporations

(attached to a late filed Form

1065)

Section 6038 Penalties

•

$10,000, per foreign corporation, for each annual accounting

period the failure occurred. This penalty begins to increase by

an additional $10,000 for each 30-day period (or fraction

thereof) following 90 days after the mailing of an IRS notice

concerning the failure. The maximum total penalty is $60,000

for each violation.

•

10% reduction of foreign taxes credits (FTC) under Sections

901 and 960. This FTC reduction penalty begins to increase

by an additional 5% reduction is made for each 3-month

period (or fraction thereof) following 90 days after the mailing

of an IRS notice concerning the failure. This additional

reduction shall not exceed the greater of $10,000 or the

annual income of the foreign business entity.

Form 5472,

Information Return of a 25%

Foreign-Owned U.S. Corporation or a Foreign

Corporation Engaged in a U.S. Trade or

Business

(attached to a late filed Form 1065)

Section 6038A(d) / 6038C(c) Penalties

•

$25,000 for each taxable year the failure occurs. This penalty

begins to increase by an additional $25,000 for each 30-day

period (or fraction thereof) following 90 days after the mailing

of an IRS notice concerning the failure.

Latham & Watkins August 26, 2022 | Number 3003 | Page 4

IRS Form

Applicable Penalties Absent Relief

Trusts & Estates

Form 1041,

U.S. Income Tax Return for

Estates and Trusts

(including series N and

QFT)

Section 6651(a)(1) Penalty

•

5% net tax liability due for the year, increasing 5% for each

additional month the failure to file continued (or fraction

thereof), up to 25% of the outstanding net tax liability due.

Form 3520,

Annual Return To Report

Transactions With Foreign Trusts and Receipt

of Certain Foreign Gifts

and Form 3520-A,

Annual Information Return of Foreign Trust

With a U.S. Owner

(Under section 6048(b))

Section 6677 Penalty

•

As applicable, the greater of $10,000 or

35% of the gross value of any property transferred to a

foreign trust for failure by a U.S. transferor to report the

creation or transfer to a foreign trust;

35% of the gross value of the distributions received

from a foreign trust for failure by a U.S. person to report

receipt of such distributions.

5% of the gross reportable amount, whichever is

greater for a U.S. owner where the foreign trust fails to

timely file Form 3520-A, or does not furnish information

required by Section 6048(b).

•

This penalty begins to increase by an additional $10,000 for

each 30-day period (or fraction thereof) following 90 days after

the mailing of an IRS notice concerning the failure. The

maximum penalty for each failure per year is the gross

reportable amount.

Individuals

Form 1040,

U.S. Individual Income Tax Return

(including series C, NR, NR-EZ, PR, SR, and

SS)

Section 6651(a)(1) Penalty

•

5% net tax liability due for the year, increasing 5% for each

additional month the failure to file continued (or fraction

thereof), up to 25% of the outstanding net tax liability due.

Form 3520,

Annual Return To Report

Transactions With Foreign Trusts and Receipt

of Certain Foreign Gifts

Section 6039F(c) Penalty

•

5% of the applicable gift amount, per month, not to exceed a

total of 25% of the applicable gift amount.

Exempt Organizations

Form 990-T,

Exempt Organization Business

Income Tax Return (and Proxy Tax Under

Section 6033(e))

Section 6651(a)(1) Penalty

•

5% net tax liability due for the year, increasing 5% for each

additional month the failure to file continued (or fraction

thereof), up to 25% of the outstanding net tax liability due.

Form 990-PF,

Return of Private Foundation or

Section 4947(a)(1) Trust Treated as Private

Foundation

If you have questions about this Client Alert, please contact one of the authors listed below or the Latham

lawyer with whom you normally consult:

Miriam L. Fisher

miriam.fisher@lw.com

+1.202.637.2178

Washington, D.C.

Brian C. McManus

brian.mcmanus@lw.com

+1.617.948.6016

Boston / Washington, D.C.

Andrew Strelka

andrew.strelka@lw.com

+1.202.637.3328

Washington, D.C.

Joshua Wu

joshua.wu@lw.com

+1.202.637.3376

Washington, D.C.

Shannon Fiedler

shannon.fiedler@lw.com

+1.617.880.4634

Boston

Juliana M. Genova

juliana.genova@lw.com

+1.202.637.2181

Washington, D.C.

Latham & Watkins August 26, 2022 | Number 3003 | Page 5

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Endnotes

IRS Notice 2020-17, 2020-15 I.R.B. 590, postponed the due date for certain Federal income tax payments from April 15, 2020,

until July 15, 2020. IRS Notice 2020-18, 2020-15 I.R.B. 590, superseded Notice 2020-17 and provided expanded relief. IRS

Notice 2021-21, 2021-15 I.R.B. 986, postponed the due date for filing Federal income tax returns in the Form 1040 series and

making certain Federal income tax payments that were originally due on April 15, 2021, to May 17, 2021.

IR-2022-155 (Aug. 24, 2022).

Id.

Nothing in the Notice impacts Taxpayer’s ability to argue that penalties should not apply because the failure to timely file a

return or to furnish required information or to provide the required notice, as applicable, was due to “reasonable cause.” See IRC

§§ 6651(a)(1), 6038(c)(4)(B), 6038A(d)(3), 6038C(c), 6039F(c)(2), 6677(d), 6698(a) flush language, 6699(a) flush language, and

6724(a).

IRC § 6651(f) (fraudulent failure to file); IRC § 6663 (fraud).

Acceptance of an offer-in-compromise conclusively settles all liabilities in the offer. IRC § 7122; Treas. Reg. § 301.7122-1(e)(5).

The Notice’s scope is not entirely clear, including whether the reduction in foreign tax credits is covered.