IRS Forgives Penalties For Millions Of Taxpayers Who Filed Late—Here’s Who Qualifies

Topline

The Internal Revenue Service said Wednesday it will waive and refund penalties for Americans who filed their 2019 or 2020 tax returns late, as the agency struggles with a massive Covid-imposed backlog that has frustrated taxpayers and politicians.

Key Facts

The relief program will automatically wipe away two years’ worth of “failure to file” penalties, which usually require taxpayers who miss the IRS’s filing deadline to pay 5% of unpaid tax per month, maxing out at up to 25% of their total unpaid tax bills.

Almost 1.6 million taxpayers who have already forked over failure to file penalties for their 2019 or 2020 returns will automatically be refunded by the end of next month, adding up to more than $1.2 billion in total refunds, the agency said in a statement.

To qualify for the penalty relief program, people need to file their 2019 or 2020 tax returns (which were originally due in 2020 and 2021) by September 30 of this year.

The IRS is also waiving certain late penalties for businesses that need to file information returns and individuals who were required to report some international transactions.

The program doesn’t apply to “failure to pay” penalties, which cost 0.5% per month and are imposed on Americans who didn’t pay their taxes on time, and doesn’t cover penalties assessed for fraudulent tax returns, the IRS said.

Key Background

The IRS says the penalty relief program will allow it to “focus its resources on processing backlogged tax returns and taxpayer correspondence.” In recent years, the agency has been stretched thin due to staffing shortages, aging technology, pandemic-related slowdowns and the added burden of sending out multiple rounds of Covid-19 stimulus checks to hundreds of millions of Americans. As a result, scores of tax returns and other paper documents—which workers need to manually enter into the IRS’s computer database—have piled up in federal offices, and many taxpayers have struggled to reach IRS staff over the phone. As of late May, the IRS was slowly working its way through a backlog of 21.3 million unprocessed paper returns, up more than 1 million from a year prior, forcing some taxpayers to wait months to get tax refunds, according to the National Taxpayer Advocate, the IRS’s internal watchdog. Members of Congress from both parties have pressed the IRS to unclog its backlog and offer relief to Americans who were hit with penalties during the pandemic.

Tangent

The Inflation Reduction Act—a climate, healthcare and tax bill passed by Democrats and signed by President Joe Biden earlier this month—includes $79.6 billion in extra funding for the IRS over the next decade. Much of that funding will be used to ramp up enforcement for nonpayment of taxes, but the bill also earmarks billions of dollars for the IRS to boost its customer service offerings and upgrade its technology.

Further Reading

Why does the IRS need $80 billion? Just look at its cafeteria. (Washington Post)