When the coronavirus pandemic hit in 2020, it upended tax season for filers and tax professionals alike. To offset the often unavoidable errors, delays and missed deadlines many taxpayers have experienced in recent years, the Internal Revenue Service announced last week it would refund more than $1.2 billion in late filing penalties for returns in 2020 and 2021.
This refund applies to forms for tax years 2019 and 2020. Refunds are set to arrive by the end of September, according to the IRS.
“The penalty relief issued today is yet another way the agency is supporting people during this unprecedented time,” Chuck Rettig, IRS commissioner, said in a news release. “This penalty relief will be automatic for people or businesses who qualify; there’s no need to call.”
While the IRS is positioning the penalty abatements as a way to help Americans, tax professionals say it may be motivated by something else. “The IRS is so behind in all their mail,” says Candace Varner, director of tax services for wealth management firm Creative Planning Inc. in Kansas City. Eliminating these late filing penalties could help clear some of the backlog.
Regardless of the reason, 1.6 million taxpayers will receive this bonus refund in the next month. Here’s how to know if you’re in line to receive some of this cash from the IRS.
[What to Do if You Can’t Pay Your Taxes]
Which Late Filing Fees Are Being Refunded?
The IRS is providing “penalty relief” for those who filed certain forms late for tax year 2019 and tax year 2020. Forms for these years were due in 2020 and 2021, respectively.
The late filing fee for the following forms from those years will be waived or refunded:
— Individual, business and estate income tax forms, including Form 1040, Form 1120, Form 1065 and Form 990, among others.
— Information returns such as 1099 forms that are required of certain businesses.
To be eligible for penalty relief for late 1099 forms, businesses must have filed the forms by August 1, 2020 for 2019 returns or August 2, 2021 for 2020 returns.
However, the window is still open for individuals and businesses to file their income tax returns and have late filing fees waived. “As long as they file on or before the end of September (2022), they won’t be assessed any penalties,” says Michael Greenwald, partner and business tax leader with accounting firm Friedman LLP in New York City.
This refund only applies to the late filing fee — which can be as much as 25% of any federal tax owed. Other fees paid don’t qualify for this refund.
“The failure to pay penalty is not being forgiven,” says Logan Allec, a CPA and owner of tax relief company Choice Tax Relief.
[How to Get the Biggest Tax Refund in 2022]
How Do I Receive My Refund?
The refund process will happen automatically. “The IRS would prefer you not contact them,” Greenwald says.
Those who have been assessed a qualifying late filing penalty but haven’t paid it will have it abated. Meanwhile, those who have paid the qualifying fee should receive a refund by the end of September, according to the IRS.
While the IRS did not state how those refunds are to be issued, Varner says the agency has issued direct deposits for other initiatives, such as the advance child tax credit, when it has a taxpayer’s account information.
What if I’m Not Eligible for a Late Filing Penalty Refund?
There are some cases in which a taxpayer may not be eligible for a refund, such as in cases when a fraudulent return was filed or the penalty was included in a tax compromise offer.
What’s more, the late filing penalty is only being forgiven for tax years 2019 and 2020. If you were late on a previous year’s return or failed to get an extension this year and have not yet filed your 2021 return, you could still owe a fee.
Allec says there are two other ways taxpayers can get penalty relief:
— First Time Abate: If you have been in compliance — that is, filed the same return on time and without penalty — for three years prior to the tax year when you received the penalty, you can request a first time abatement, according to Allec. This administrative waiver can be applied to failure to file, failure to pay and failure to deposit fees.
— Reasonable Cause: If you aren’t eligible for a first time abatement, you can request the fee be waived for reasonable cause. Reasonable cause can include illness, death or natural disaster but not reliance on a tax professional to file for you.
[READ: How the 2022 Tax Filing Season Was Different.]
Why Is the IRS Forgiving Late Filing Penalties?
Tax advocacy organizations and some members of Congress have been pushing for penalty relief, according to Allec, but he says the IRS likely also recognized that the COVID-19 pandemic set the stage for people to request penalty abatements. “You can imagine how many reasonable cause requests they are going to get,” he says.
The pandemic was particularly disruptive to the tax seasons in 2020 and 2021, when tax returns for 2019 and 2020 were due. “Those years we’re talking about, the (filing) deadlines changed more than once,” Varner says. “It was very confusing for people.”
Forgiving these penalties could be a win-win for taxpayers and the IRS alike. “It takes a lot of work to collect penalties,” Greenwald says. With many late filing penalties not being substantial, it may not be worth the effort to collect. By erasing these penalties, the government may be able to clear out some of its backlog and become more timely in processing correspondence and other paperwork going forward.
Greenwald notes: “We in the professional (tax) community are hopeful that this will be the first step for the IRS to dig out of the hole they are in.”
More from U.S. News
What to Know About Filing Taxes
Legal Secrets to Reducing Your Taxes
What to Know About Stimulus Payments and Your Taxes
Will You Get a Bonus Tax Refund From the IRS? originally appeared on usnews.com
