The Internal Revenue Service gets grouchy when people do not file their income taxes on time, either by skipping an extension request, filing after the extension deadline or not submitting their tax return at all.
That’s not a surprise, and the IRS metes out a stiff “failure to file” penalty to emphasize its displeasure. It’s 5% of unpaid tax for each late month, making it more costly than the “failure to pay” penalty which levies a 0.5% ding for each month the taxes go unpaid. The IRS also charges interest on the penalties.
Yet here’s something that might be a pleasant surprise: the IRS is giving a break to tardy taxpayers by waiving the failure to file penalty applied to returns for tax years 2019 and 2020.
It’s a nod to the havoc of the pandemic’s earlier stages, when taxpayers and the IRS were scrambling. IRS and Treasury Department officials pushed the 2019 tax returns originally due on April 15, 2020 to July 15. The following year, they nudged the 2020 tax deadline to May 17, 2021. It’s also a way for the IRS to free up focus to address a backlog in tax return processing.
The best news for the freshly-announced penalty waiver? In many cases, people do not need to do a single thing to obtain the relief.
The IRS says it is automatically reimbursing people who already paid the penalty, estimating it will be refunding or crediting $1.2 billion in assessed penalties to nearly 1.6 million taxpayers. Most of these payments will occur by September’s end, the tax agency said.
Dividing the number of eligible taxpayers by the sum, the average reimbursement could work out to be $750. But actual repayments will vary widely based on how the size of the tax debt and how late it was before the taxpayer filed.
There’s more good news, but with a fast-approaching catch: Anyone who still hasn’t filed their returns from those years can still avoid the filing penalty when submitting the return by Sept. 30, the tax agency said. But the chance to skip the penalty disappears after that date.
Most people poised to get the relief have already filed the eligible tax returns long ago. But that little last window is certainly worth it for people who still haven’t filed.“This is a real benefit, and the first thing to do, the most important thing, is to file the returns,” said Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals.
O’Saben’s seen the results in his own tax practice. The IRS recently refunded one of his clients $69 for a 2019 return sent in after the deadline came and went on extensions. (O’Saben didn’t handle the late return at issue.)
There are two reasons why the penalty relief is worth understanding. At a time when costs are expensive and still rising, every bit of extra cash helps. Besides, the Sept. 30 deadline to act is a red-letter reminder about another looming tax deadline, October 17.
That’s the time people have to file their most recent, 2021 income tax returns penalty-free if they got an extension. The IRS estimates 19 million taxpayers asked for more time to file their federal income tax return this year.
After Oct. 17, they’ll be staring at failure to file penalties, just like people who didn’t act on the temporary waiver that’s closing soon for the two prior tax returns.
Remember what penalty is — and isn’t — being waived
The IRS is giving a break on the failure to file penalty, but it is not applying the relief to the failure to pay penalty. Each penalty runs up to 25% of the unpaid tax, but the filing penalty racks up the more cash and sooner. This is why tax professionals constantly advise taxpayers to still file a return or at least submit an extension request during tax time to avoid the failure to file penalty.
The maximum combined failure to pay and failure to file penalties is 47.5%, according to H&R Block
Remember, the IRS can work out installment plans on unpaid tax obligations or an “offer in compromise” when taxpayers say they can’t pay the full tax debt but can work a deal for a smaller sum. “The IRS is extremely willing to work with taxpayers once that return is filed,” O’Saben said.
If taxpayers still have outstanding tax debts amid the penalty waivers, O’Saben said the money from the waived penalty is first applied to the owed sum before any check would arrive.
Also remember, if taxpayers are due a refund, the IRS notes there’s no failure to file penalty. But people only have three years from the original filing due date to claim the refund. After that, it’s the government’s cash.
As a general matter, eligible taxpayers should be expecting a paper check on the penalty-related reimbursement, said IRS spokesman Eric Smith. Around or before that time, Smith said they should be expecting a written notice from the tax agency informing them of the action.
“This penalty relief will be automatic for people or businesses who qualify; there’s no need to call,” IRS Commissioner Charles Rettig said when the IRS announced the waiver last month.
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The penalty waivers are also going to let the IRS focus its staff on winding down a backlog of returns, the agency noted. As of early September, the IRS has 7.2 million unprocessed individual tax returns still to go.
For people who still haven’t filed
Move swiftly and submit the return electronically instead of mailing in a paper return, O’Saben said.
Indeed, the same advice to move briskly and avoid paper returns applies to taxpayers who still haven’t turned in their 2021 tax returns and are nearing the Oct. 17 deadline, he noted.
The IRS is bogged down in too much paper. Of the 7.2 million tax returns still awaiting IRS review, 5.6 million are unprocessed paper returns.
Don’t wait on those yet-to-be-filed 2021 returns, the IRS has been saying for months. “If a taxpayer has all the necessary information to file an accurate return, they can file electronically at any time before the October deadline and avoid a last-minute rush to file,” the agency noted earlier in the summer.