Filing your taxes can be a confusing and time-consuming process, and the last thing you want is to incur a late-filing penalty. Unfortunately, the COVID-19 pandemic has made it difficult for many taxpayers to file their taxes on time. In response, the IRS has announced that it will refund $1.2 billion in late-filing penalties to taxpayers who have faced a penalty for failing to file on time.
On August 24, 2022, the Internal Revenue Service (IRS) announced through Notice 2022-36 that it would refund $1.2 billion in late-filing penalties to taxpayers who have faced a penalty for failing to file. In other words, more than 1.6 million taxpayers who have already paid the fine will get their money deposited back into their bank accounts.
This announcement has come as a relief to many taxpayers who have experienced financial difficulties during the pandemic. So how exactly does this news affect you? Let’s go over some of the most frequently asked questions about the new penalty refund.
Who is eligible?
To be eligible to receive the penalty relief, you must file your late 2019 and 2020 federal income tax return before September 30, 2022. Apart from regular taxpayers, this relief also applies to certain businesses, banks, employers, and taxpayers who file various international information returns. If you’re unsure whether you’d qualify, read the full guideline provided by the IRS. The refund is automatic, which means you won’t need to apply for it.
Note that if you haven’t paid any fines yet, you won’t receive a refund. Instead, the penalty will be abated.
Why is the IRS giving out refunds?
According to IRS commissioner Chuck Rettig, the reasons for the penalty refunds are twofold. Not only will this decision provide some relief to taxpayers who file their 2019 and 2020 taxes late due to the pandemic, but it will also allow the Internal Revenue Service to focus its resources on processing backlogged tax returns so that it can return to normal operations for the 2023 filing season.
So if you’re one of the many struggling taxpayers affected by the pandemic who incurred hefty penalty charges, don’t worry — the IRS has your back. But remember, you must still file your late taxes before the September deadline to be eligible for a refund!
What is the failure-to-file penalty?
The failure-to-file penalty is a fee that the IRS charges if you don’t file your taxes by the deadline. The penalty is 5% of the total amount you owe for each month you’re late up to five months, or 25% of the total amount you owe.
For example, if you owe $1,000 in taxes, you’ll owe $50 for each month you’re late to file, up to a cap of $250. That may not seem like too much, but if you owe more in taxes — such as upwards of $10,000 — the failure-to-file penalty can put a serious dent in your bank account.
Other common tax penalties
The failure-to-file penalty is only one of a variety of penalties that taxpayers can face. So even though the IRS is giving you a pass for filing your taxes late for 2019 and 2020, that doesn’t mean you’re off the hook for other penalties you might incur now or in the future.
Here are some other common types of tax penalties you should be aware of:
- Failure-to-pay penalty. The failure-to-pay penalty is different from the failure-to-file penalty. A failure-to-file penalty is charged if you don’t file your tax return by the due date. In contrast, a failure-to-pay penalty is charged if you don’t pay the tax you report on your tax return by the due date.
- Underpayment of Estimated Tax by Individuals Penalty. The underpayment penalty is imposed on individuals who don’t pay enough estimated tax on their income or who pay their estimated tax late. This penalty can apply even to individuals who are eligible for tax refunds.
- Erroneous Claim for Refund or Credit Penalty. The Erroneous Claim for Refund or Credit Penalty is designed to deter taxpayers from filing incorrect claims in an effort to receive a refund or credit to which they are not entitled. The penalty amount can be up to 20% of the excessive amount claimed.
- Dishonored Check Penalty. The IRS may charge you with a Dishonored Check Penalty if there are insufficient funds in your bank account to cover the tax payment you owe.
How to get rid of your back taxes
The new IRS penalty refund can be a nice financial cushion, but what if you’re still crushed by a significant amount of back taxes? If you find yourself in such a situation, don’t despair. The IRS offers some options to help you catch up:
- Make a payment plan. Setting up a payment plan with the IRS will allow you to make smaller payments over time, making it easier to manage your debt. Keep in mind that with a payment plan, interest and late payment fees can still accrue until you bring your balance down to zero.
- Set up an offer in compromise. If you cannot pay your back taxes in full, you may be able to negotiate an offer in compromise with the IRS. This means you would agree to pay a smaller amount than what you actually owe. To determine your eligibility for an offer in compromise, the IRS will look at factors such as your income and expenses.
- “Currently not collectible” status. If you’re facing financial hardship and can’t afford to pay your taxes at the moment, you can request a delay in collection by filling out the Collection Information Statement Form. This would allow you to put your debt on hold until you’re in a better position to pay it off. But remember, just because your account is in “currently not collectible” status doesn’t mean your debt goes away; the IRS can still file a tax lien against you.
Did the IRS give me too much money?
Though rare, the IRS can make such mistakes. If you receive a tax refund that seems way too high, you might want to wait before cashing the check or using the money deposited into your bank account. If the IRS indeed made a mistake in their calculations, they’ll not only send you a notice explaining the error but also demand the money back.
So if the refund amount doesn’t look correct, hold off on spending it until you’re sure everything is above board. Otherwise, you might end up owing the IRS money you can’t pay back.
When can I expect my refund?
As long as you file your 2019 and 2020 returns by the September deadline, the IRS claims that you should expect to receive your refund very soon — as early as the end of September.
Why do I have a penalty on my tax return?
There are many reasons you could face a tax return penalty. It could be that you didn’t file your taxes on time or that you underpaid them throughout the year. It could also be that you made some math errors on your tax return. If you’re not sure why you were penalized, the best thing to do is to contact the IRS directly and sort it out with them.
- The IRS is issuing penalty refunds to help relieve some of the financial burden caused by the COVID-19 pandemic.
- To be eligible for the penalty refund, you must file your 2019 and 2020 tax returns before the September 30th deadline.
- If you fail to file your taxes on time, the IRS charges 5% of the unpaid tax each month that it’s late — up to 25% of the total amount due.
- The refunds will process automatically, so there’s no need to apply for yours.
- This penalty relief only applies to late-filing penalties. Other common tax penalties — such as underpayment of estimated taxes, erroneous claims for credit, and dishonored checks — will not be considered.
- If you qualify and file before the deadline, you can expect to see the funds in your account as early as the end of September.
Tackle your back taxes with help
Even though this penalty refund can help lessen your tax burden, it’s still important to stay organized throughout the year so that you’re not scrambling to gather documentation come April. And if you do find yourself owing back taxes, don’t panic! There are a few options available to you, such as payment plans and tax relief programs.
If you need personalized help when it comes to filing your taxes, you can find plenty of help in the tax community. Consider working with tax professionals who can help you maximize your deductions and ensure that you file your taxes correctly. Use SuperMoney’s comparison tool to find the best tax preparation services for you.
View Article Sources
- COVID tax relief: IRS provides broad-based penalty relief for certain 2019 and 2020 returns due to the pandemic; $1.2 billion in penalties being refunded to 1.6 million taxpayers — IRS.gov
- Notice 2022-36: Penalty Relief for Certain Taxpayers Filing Returns for Taxable Years 2019 and 2020 — IRS.gov
- Dishonored Check Penalty – IRS.gov
- Erroneous Claim for Refund or Credit — IRS.gov
- Failure to Pay Penalty — IRS.gov
- Underpayment of Estimated Tax by Individuals Penalty – IRS.gov
- Internal Revenue Bulletin: 2022-36 – IRS.gov
- Collection Information Statement – IRS.gov
- IRS Can Issue Tax Refunds, Then Demand Them Back With Interest – Forbes
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