hourglass counting down in front of a man looking down
hourglass counting down in front of a man looking down

What you need to know about the IRS penalty waiver on 2020 and 2021 tax returns

In a significant move aimed at alleviating the financial burden on taxpayers, the Internal Revenue Service (IRS) has announced a waiver of nearly $1 billion in late-payment penalties for millions of individuals, businesses, trusts, estates, and tax-exempt organizations that were not sent automated collection reminder notices during the pandemic.

Understanding the tax relief measures

The relief is automatic for eligible taxpayers, including those who:

  • Received an initial balance due notice between February 5, 2022, and December 7, 2023
  • Filed specific forms—1040, 1041, 1120, or 990-T
  • Had a tax liability of less than $100,000 per year

However, it’s essential to note that while this waiver applies to the failure-to-pay penalty (0.5% of unpaid taxes per month or partial month, capped at 25%), it does not cover accrued interest or the failure-to-file penalty.

What taxpayers should expect from the IRS penalty waiver

For eligible taxpayers, the penalty relief is automatic—no action is required on their part. Those who’ve already paid the failure-to-pay penalties for the specified tax years will receive refunds or have their payments credited to other outstanding tax liabilities.

However, it’s crucial to highlight that while the failure-to-pay penalties will be waived, late-payment penalties for unpaid balances from 2020 and 2021 will resume on April 1, 2024. Taxpayers should be vigilant about their tax obligations and explore available options if they anticipate difficulties settling their tax bills.

The pause and resumption of collection notices

The IRS suspended automated reminders for overdue tax bills from February 2022, post the initial notice. Despite the absence of reminders, penalties continued accruing for those who hadn’t paid after the first notice. This temporary pause in reminder notices was, in part, intended to give the IRS an opportunity to catch up on their backlog.

With the end of this relief period approaching, collection notices are set to resume in 2024. To mitigate the potential impact on taxpayers who haven’t received communications for an extended duration, the IRS plans to issue special reminder letters starting in January 2024. These letters will serve as an alert about liabilities, available payment methods, and details regarding penalty relief.

You may also be interested in: What happens if you miss the extended tax deadline

IRS assistance for taxpayers

The IRS emphasizes the availability of various payment options and online tools to assist taxpayers in managing unpaid tax debts. 

These tools include:

  • The IRS Document Upload Tool
  • Improved phone services
  • The provision of bots capable of handling basic queries, modifying payment plans, and requesting transcripts 

Additionally, taxpayers are encouraged to create an IRS Online Account to access information about unpaid tax bills and apply for online payment plans.

Don’t put your head in the sand!

If you receive an IRS notice, it’s important to take action promptly. Ignoring tax liabilities can lead to further complications, so be sure to address your outstanding tax issues and make use of the flexible payment options offered by the IRS.

While the IRS penalty waiver eases the burden of failure-to-pay penalties, it’s crucial to remain aware of your tax responsibilities and take advantage of the available assistance and payment options. As the IRS gears up to resume collection notices, we encourage you to stay informed, act promptly upon receiving communications, and seek professional advice where you need it.

You may also be interested in: Tax & market updates from our 2024 Financial Planning Webinar 

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