IRS Grants Penalty Relief for Certain 2019 and 2020 Returns

The IRS on August 24 released Notice 2022-36, Penalty Relief for Certain Taxpayers Filing Returns for Taxable Years 2019 and 2020 (the “Notice”).  The Notice waives specified failure-to-file penalties and international information return (“IIR”) penalties for 2019 and 2020 returns filed no later than September 30, 2022, as well as failure-to-file penalties for certain information returns filed by August 1, 2020 or 2021 (for tax years 2019 or 2020, respectively).  Eligible penalties will be automatically waived, or – if already assessed – abated, refunded, or credited without the need for taxpayers to request relief.  Most refunds should be issued by the end of September.

In recent years, the IRS has aggressively pursued late filing penalties, particularly for returns required to report information regarding foreign trusts and corporations.  In such cases, a late filing has often resulted in an automatic penalty, regardless of the taxpayer’s reason for delay.  These penalties can range from $10,000 for a late Form 5471 to potentially millions of dollars for a late Form 3520 or 3520-A, depending on the size of the trust or foreign gift.    

For example, if a U.S. person is an owner of a foreign trust, both the U.S. person and the trust will have information reporting obligations (on Forms 3520 and 3520-A, respectively).  If the U.S. person fails to report a contribution to or distribution from the trust on Form 3520, they face a penalty of the greater of $10,000 or 35 percent of the amount contributed or received.  If the trust fails to file Form 3520-A, the trust’s U.S. owner will face an additional penalty of the greater of $10,000 or 5 percent of the gross value of the portion of trust assets that he or she is deemed to own.

To which returns does the Notice’s relief apply?

The relief applies to late filing penalties imposed on the following returns:

• Income tax returns and IIRs for tax years 2019 and 2020 that are filed on or before September 30, 2022;
• Information returns for tax year 2019 that were filed on or before August 1, 2020; and
• Information returns for tax year 2020 that were filed on or before August 1, 2021.

To which penalties does the Notice’s relief apply?

The Notice provides for automatic waiver, abatement, refund, or credit of the following penalties imposed with respect to eligible returns:

• Penalties for failure to timely file the following income tax returns:
  • Form 1040, U.S. Individual Income Tax Return, and certain other Form 1040 series returns;
  • Form 1041, U.S. Income Tax Return for Estates and Trusts, and certain other Form 1041 series returns;
  • Form 1120, U.S. Corporation Income Tax Return, and certain other Form 1120 series returns;
  • Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return;
  • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and
  • Form 990-T, Exempt Organization Business Income Tax Return.

• Penalties for failure to timely file or failure to show the required information on:
  • Form 1065, U.S. Return of Partnership Income; and
  • Form 1120-S, U.S. Income Tax Return for an S corporation.
• Penalties systematically assessed when one of the following IIRs is attached to a late-filed Form 1120 or Form 1065:
  • Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations; and
  • Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
• Penalties assessed by the campus assessment program for 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.
• Penalties under Section 6721(a)(2)(A) for failure to file information returns (such as the Form 1099 series) that were:
  • Filed on or before August 1, 2020, for 2019 returns; and
  • Filed on or before August 1, 2021, for 2020 returns.

Are there exceptions to the relief provided by the Notice?

Yes. The penalty relief does not apply to penalties: (i) not specifically listed in the Notice; (ii) imposed for fraud or fraudulent failure to file; (iii) determined or settled in an accepted offer in compromise, closing agreement, or judicial proceeding.

With respect to late-filed Forms 5471 and 5472, the relief specifically does not apply to late Forms attached to an amended (versus late, originally filed) Form 1120 or 1065, or to Forms 5471 or 5472 attached to returns other than Forms 1120 or 1065.

How can you find out more?

Please contact a member of Caplin & Drysdale's International Tax or Tax Disputes & Tax Litigation group if you have questions concerning this alert or for more information.