The Internal Revenue Service (IRS) announced that it will waive penalty fees for taxpayers who failed to pay back taxes for the tax years 2020 and 2021, providing significant relief to nearly 5 million individuals, businesses, and tax-exempt organizations. This action, which is set to benefit mostly those earning under $400,000 per year, will alleviate penalties amounting to approximately $1 billion.
The decision to offer this relief is rooted in the disruptions caused by the COVID-19 pandemic. The IRS had temporarily paused the issuance of automated reminders for overdue tax bills starting in February 2022. This pause, according to the IRS, contributed to taxpayers' unawareness of accruing balances, leading to the failure-to-pay penalties.
IRS Commissioner Daniel Werfel, explaining the rationale behind this unprecedented step, said, "It was an extraordinary time and the IRS had to take extraordinary steps." He emphasized that the waiver is automatic for many taxpayers, requiring no additional action from them. Werfel highlighted the IRS's commitment to assisting taxpayers, remarking, "People need to know the IRS is on their side."
To qualify for this automatic relief, taxpayers must have filed a Form 1040, 1041, 1120 series, or Form 990-T tax return for the years 2020 or 2021. Additionally, they should owe less than $100,000 per year in back taxes and have received an initial balance-due notice between Feb. 5, 2022, and Dec. 7, 2023. For those who have already paid the failure-to-pay penalty, the IRS plans to issue refunds.
The relief, however, does not extend to interest charged on unpaid taxes for 2020 and 2021, as the IRS lacks the statutory authority to waive interest. Werfel noted that penalties for late tax payments can become substantial, adding 0.5 percent to the original tax bill monthly and capping at 25 percent.
As the IRS resumes sending out reminders for overdue payments from tax years 2020 and 2021 next month, taxpayers may be surprised to find their bills significantly higher due to accumulated interest and penalties. To clarify the impact of the new action, the IRS will send special reminder letters in January detailing the overall liability, the amount of penalties waived, and instructions for paying the remaining liability.
This penalty relief represents a substantial reduction in tax burdens, with an average reduction of about $206 per eligible person for each tax year. Commissioner Werfel stressed that this move is a significant step by the IRS to support taxpayers, particularly those with modest incomes.
