IRS Notice 2022-36 and Late Filing Penalty Relief

In August 2022, the Internal Revenue Service (IRS) issued Notice 2022-36, which provided penalty relief for many individuals and businesses. This measure was a response to the difficulties many taxpayers experienced due to the COVID-19 pandemic. The relief was also intended to allow the IRS to dedicate its resources to processing a backlog of tax returns and correspondence. The notice targeted penalties for failing to file certain tax returns for the 2019 and 2020 tax years on time.

Penalties Waived by the Notice

The primary penalty waived under Notice 2022-36 was the failure-to-file penalty. This penalty is assessed when a taxpayer does not file their required tax return by the due date, including extensions. The penalty is calculated as 5% of the unpaid tax for each month or part of a month that the return is late, but it does not exceed 25% of the unpaid tax liability.

The notice also provided relief for penalties related to the late filing of specific international information returns (IIRs). For example, penalties for late filing of Form 3520 can be as high as 35% of the property transferred, while failing to file Form 5472 can result in a $25,000 penalty. In a procedural change, the IRS announced in late 2024 that it would stop automatically assessing penalties for late-filed Forms 3520 and 3520-A, and will now review for reasonable cause before imposing them.

The notice did not cover all penalties. It explicitly excluded the failure-to-pay penalty, which applies when a taxpayer files their return on time but does not pay the full amount of tax owed by the deadline. The relief also did not extend to accuracy-related penalties for understating tax liability or penalties for fraudulent returns. The relief did not apply if the penalties were part of a previously accepted offer in compromise or a formal closing agreement with the IRS.

Covered Tax Returns and Filing Deadline

The penalty relief under Notice 2022-36 was a temporary measure that is no longer available, as the qualifying deadline has passed. To be eligible for the waiver, the specified tax returns for the 2019 or 2020 tax years had to be filed on or before September 30, 2022. This applied whether the return was for the 2019 tax year, originally due in 2020, or the 2020 tax year, originally due in 2021.

A broad range of common income tax returns were covered by this relief, as well as certain information returns. To qualify for the automatic penalty abatement, the following forms for the 2019 or 2020 tax years had to be filed by the September 30, 2022, deadline:

• Individual income tax returns: The Form 1040 series
• Estate and trust returns: The Form 1041 series
• Corporate income tax returns: The Form 1120 series
• Partnership returns: Form 1065
• Exempt organization returns: Form 990-PF and Form 990-T
• International information returns: Form 3520, Form 3520-A, and Forms 5471 and 5472 when attached to a late-filed corporate or partnership return

Receiving the Penalty Abatement or Refund

The relief provided by Notice 2022-36 was administered automatically by the IRS, so taxpayers did not need to take action to request it. For those who had not yet been assessed the late-filing penalty, the IRS system automatically suppressed the penalty if the eligible 2019 or 2020 return was filed by the deadline. This meant the penalty was never charged.

For taxpayers who had already filed their returns late and had penalties assessed against their account, the IRS automatically abated them. This meant the penalty charge was removed from the taxpayer’s account balance without any need to contact the IRS or submit a formal penalty abatement request.

If taxpayers had already paid the late-filing penalty, the relief was also automatic. The IRS was responsible for issuing a refund of the paid penalty amount or applying it as a credit to any other outstanding tax liability. The agency announced that it would issue over $1.2 billion in refunds and credits to approximately 1.6 million taxpayers.