IRS Announces Automatic Penalty Relief for 2020 and 2021 Tax Years

Earlier this week, the IRS announced in Notice 2024-7 that it will be waiving the failure-to-pay penalties for eligible taxpayers that failed to pay back taxes for the tax years 2020 and 2021.

The IRS temporarily suspended mailing automated reminders to pay overdue tax bills during the pandemic, beginning in February 2022, and agency leadership says the pause in automated reminders is a reason behind the decision to forgive the failure-to-pay penalties. The IRS estimates 5 million tax returns—filed by 4.7 million individuals, businesses, trusts, estates and tax-exempt organizations—are eligible for the penalty relief.

This penalty relief is automatic, which means that if you’re an eligible taxpayer, you don’t need to take any action. Eligible taxpayers who already paid their full balance will benefit from the relief too. If an eligible taxpayer has already paid failure-to-pay penalties for 2020 and 2021 tax years, the IRS will issue a refund or credit the payment toward another outstanding tax liability.

Eligible taxpayers include individuals, businesses, trusts, estates and tax-exempt organizations, and estates that filed certain Form 1040, 1120, 1041 and 990-T series income tax returns for tax years 2020 or 2021, with an assessed tax of less than $100,000, and that were in the IRS collection notice process or were issued an initial balance due notice between Feb. 5, 2022, and before Dec. 7, 2023. The $100,000 limit applies separately to each return and each entity.

The IRS has already adjusted eligible individual accounts, and will follow with adjustments to business accounts in late December to early January. Trusts, estates and tax-exempt organizations will see relief in late February to early March 2024.

The IRS will send the first round of refunds starting now through January 2024. If a taxpayer does not receive a refund, a special reminder notice may be sent with their updated balance beginning in early 2024.

If you believe that you were assessed and/or paid a failure-to-pay penalty for the 2020 or 2021 tax year, please reach out to your LMC professional.