IRS Notice 2022-45 and Automatic Penalty Relief

The Internal Revenue Service (IRS) provided specific administrative relief through the issuance of Notice 2022-36. This action was a direct response to challenges faced by taxpayers, particularly those with certain international information reporting obligations. The notice established a framework for penalty abatement for a defined group of taxpayers who had not met specific filing deadlines.

Scope of the Penalty Relief

The relief outlined in Notice 2022-36 specifically targets penalties associated with the late filing of 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. These forms are fundamental for taxpayers who engage in transactions with foreign trusts or receive substantial gifts from foreign persons.

For Form 3520, the penalty is generally the greater of $10,000 or a percentage of the gross reportable amount. This can be 35% of the gross value of property transferred to a foreign trust or distributions received from one. For failing to report foreign gifts, the penalty is 5% of the gift’s value for each month the failure continues, capped at 25% of the total gift amount. The penalty for a late Form 3520-A is typically the greater of $10,000 or 5% of the gross value of the trust’s assets treated as owned by the U.S. person.

Eligibility for Automatic Relief

The relief was limited to filings for the 2019 and 2020 tax years. This meant that any penalties assessed or assessable for these two years were eligible for abatement, provided other conditions were satisfied. The notice did not extend to other tax periods, focusing narrowly on the timeframe most impacted by global disruptions.

The most critical requirement for eligibility was a specific filing deadline. The eligible Forms 3520 and 3520-A for the 2019 and 2020 tax years must have been filed on or before September 30, 2022. Taxpayers who had already filed their returns before the notice was issued, but had done so late, were included in the relief. Those who had not yet filed were given a window to submit their returns by this date to have the late-filing penalties waived automatically.

Receiving Refunds for Paid Penalties

A significant component of the relief measure addressed taxpayers who had already paid penalties for the late filing of their 2019 or 2020 returns. The IRS established a process to automatically refund these payments to eligible taxpayers. This meant that individuals and entities who qualified for the relief did not need to take any action, such as filing a claim or contacting the agency, to initiate the refund process. The abatement and subsequent refund were designed to be seamless for the taxpayer.

The IRS stated it would issue refunds or apply the amount as a credit to any outstanding tax liabilities. The agency projected that the process of issuing these refunds would be completed by the end of September 2022. For those who had penalties assessed but had not yet paid them, the IRS would automatically abate the penalties from their accounts.