IRS Waives Failure-to-Pay Penalties for Nearly 5 Million Taxpayers

The Internal Revenue Service (IRS) building in Washington on June 28, 2023. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) said Tuesday that it is providing failure-to-pay penalty relief for roughly 4.7 million taxpayers who didn’t receive automated collection reminder notices from the tax agency.

The IRS said in a Dec. 19 announcement that the $1 billion or so in total penalty relief will be granted to certain individual taxpayers, businesses, and tax-exempt organizations, for the taxable years 2020 and 2021.

The taxpayers eligible for the relief are those who did not receive automated reminders from the IRS to pay overdue tax bills when the agency temporarily suspended the mailing of such notices in February 2022 “due to the unprecedented effects of the COVID-19 pandemic.”

Normally, these reminders would have been sent as a follow-up after an initial notice but the IRS didn’t send them out because it was swamped by a backlog of millions of original and amended tax returns filed at the height of the pandemic that the agency was unable to process.

The IRS did, however, send out initial balance due notices and so penalties for failing to pay taxes owed continued to accrue.

Citing this “unusual situation,” the IRS said it’s waiving failure-to-pay penalties for certain affected taxpayers in advance of resuming normal collection notices for tax years 2020 and 2021.

The tax relief is automatic but applies only to eligible taxpayers who owe less than $100,000 in back taxes.

“The IRS should be looking out for taxpayers, and this penalty relief is a common-sense approach to help people in this situation,” IRS Commissioner Danny Werfel said in a statement. “We are taking other steps to help taxpayers with past-due bills, and we have options to help people struggling to pay.”

The failure-to-pay penalty will resume on April 1, 2024, for those taxpayers who are eligible for the relief.

Eligibility

Taxpayers who are eligible for the automatic relief include individuals, businesses, trusts, estates, and tax-exempt organizations that filed certain tax forms, including 1040, 1120, 1041, and 990-T income tax returns.

The relief covers tax years 2020 or 2021, but only applies to those with an assessed tax of less than $100,000 and covers taxpayers who were issued an initial balance due notice between Feb. 5, 2022, and Dec. 7, 2023.

The IRS said that roughly 70 percent of the taxpayers eligible for the relief earn less than $100,000 per year.

Normally, failing to file taxes on time can result in a 5 percent monthly penalty, up to 25 percent of the owed tax.

A failure-to-pay penalty applies if taxes aren’t paid by the due date or within 21 calendar days of a payment notice.

The IRS charges interest on unpaid taxes, compounded daily based on the outstanding balance.

Interest Rates for Underpayment

The IRS recently announced what its various interest rates will be for the first quarter of 2024, including the rate applied to underpayment of taxes.

For individuals, the rate for overpayments (payments made in excess of the amount owed) and underpayments (taxes owed but not fully paid) will be 8 percent per year, compounded daily.

For corporations, the rate for overpayments will be 7 percent, dropping to 5.5 percent for the portion of a corporate overpayment exceeding $10,000.

Large corporate underpayments will carry an interest rate of 10 percent.

The interest rates announced by the IRS are calculated from the federal short-term rate determined during October 2023, as per the latest revenue ruling.

Generally, for taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus three percentage points.

For large corporate underpayments, the rate is the federal short-term rate plus five percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 is the federal short-term rate plus half a percentage point.

Demands to Return Pandemic-Era Relief Funds

While the IRS is waiving failure-to-pay penalties for nearly 5 million Americans, it also recently announced that it was sending letters to around 20,000 taxpayers demanding that they return wrongly claimed and received pandemic-era tax credits.

The letters demanding a return of pandemic-era relief money relates to a flood of bad claims for the pandemic-era relief program known as the Employee Retention Credit (ERC). This is a refundable tax credit designed for businesses that continued paying employees during COVID-19 shutdowns.

A large number of improper ERC claims were pushed by predatory promoters on unwitting businesses, the IRS said.

An investigation by the IRS Criminal Investigation division uncovered over $2.8 billion of potentially fraudulent ERC claims.

So far, 15 fraudulent ERC cases have resulted in federal charges and, of these, six have resulted in convictions. Four of those cases have reached the sentencing phase, with the average sentence being 21 months, the IRS said.

The ERC tax credit, which is somewhat complex, is available to employers, not individual taxpayers.

Since the program was enacted, over 3.6 million claims have come in, with ERC-related fraud getting worse over time.