Notice 2022-36: IRS Tax Penalty Relief Explained

The Internal Revenue Service issued Notice 2022-36 as a measure of administrative relief for a wide range of taxpayers. This action was a direct response to the difficulties caused by the COVID-19 pandemic, which created challenges for individuals and businesses attempting to meet their tax obligations. The notice provided broad, automatic relief from certain penalties for late-filed returns for the 2019 and 2020 tax years.

The primary aim of the guidance was to help taxpayers who were unable to file on time due to the global health crisis and to allow the IRS to manage its resources more effectively by reducing its backlog. By forgiving over a billion dollars in penalties, the agency sought to ease the burden on those who fell behind during a period of widespread disruption.

Taxpayer Eligibility for Relief

To qualify for the penalty relief outlined in Notice 2022-36, taxpayers had to meet a specific deadline. The core requirement was that all eligible 2019 and 2020 tax returns had to be filed on or before September 30, 2022. This deadline was the most important factor in determining eligibility, and missing it meant forfeiting the automatic relief.

The program applied to individuals, corporations, trusts, estates, and other entities that met this filing requirement. Taxpayers did not need to contact the IRS or file a special request to be considered for the relief, as the agency’s systems were set up to automatically identify eligibility if the specified returns were submitted by the cutoff.

Certain conditions, however, made a taxpayer ineligible for this relief, even if they met the filing deadline. The notice explicitly excluded cases where penalties were assessed for fraudulent failure to file. This penalty is significantly higher than the standard one, amounting to 15% of the unpaid tax for each month the return is late, with a maximum of 75% of the unpaid tax.

Furthermore, relief was not available if the penalties were part of a previously accepted Offer in Compromise or a formal closing agreement with the IRS. Another exclusion involved penalties that had been finally determined by a judicial proceeding, as the administrative relief could not override that legal judgment. The relief was also narrowly focused on the failure-to-file penalty and did not extend to other types of penalties, such as the failure-to-pay penalty.

Covered Tax Returns and Penalties

The relief provided under Notice 2022-36 was specifically targeted at the failure-to-file penalty. This penalty is assessed when a taxpayer does not file their return by the due date, including extensions, and is calculated as 5% of the unpaid tax for each month that a return is late, capping at 25% of the unpaid tax liability. For returns filed more than 60 days late, a minimum penalty also applies; for returns due in 2020, this was the lesser of $435 or 100% of the tax owed.

A wide range of common income tax returns were covered by this relief. For individuals, this included the entire Form 1040 series. For entities, the relief extended to fiduciary returns like Form 1041 for estates and trusts, partnership Form 1065, S corporation Form 1120-S, and the Form 1120 series for corporations. Tax-exempt organizations that file Form 990-PF or Form 990-T were also included.

The notice also provided relief for filers of certain international information returns (IIRs), which often carry substantial penalties. This included Form 5471 and Form 5472 when attached to a late-filed Form 1120 or Form 1065. Additionally, penalties for late-filed Form 3520 and Form 3520-A were also abated.

Receiving Penalty Abatement and Refunds

The administration of the relief provided by Notice 2022-36 was designed to be automatic, requiring no direct action from most eligible taxpayers. For those who filed their 2019 or 2020 returns late but before the September 30, 2022, deadline and had not yet been assessed a failure-to-file penalty, the IRS simply did not assess the penalty. The system was programmed to recognize the filing under the notice’s provisions, preventing the penalty from ever being applied.

For taxpayers who had already been assessed the penalty before the notice was issued, the IRS took proactive steps to abate it. If the penalty had been assessed but not yet paid, the balance due was cleared without any need for the taxpayer to file a request for abatement.

The process was also automatic for the nearly 1.6 million taxpayers who had already paid the failure-to-file penalty for the 2019 or 2020 tax years. The IRS initiated a process to issue refunds or apply credits to taxpayer accounts. Taxpayers who were owed money could expect to receive a refund check or see a credit applied to any outstanding tax liabilities, and the IRS announced its intention to complete the issuance of these automatic refunds and credits by the end of September 2022.