Overview of Penalty Relief
In the latest in a series of IRS moves to help taxpayers who have been affected by the COVID-19 pandemic, IRS Notice 2022-36 provides penalty relief to most individuals and businesses who have filed, and can still file, certain 2019 or 2020 returns late.
For those taxpayers who already filed these returns and paid a late-filing penalty (generally 5% of the unpaid tax per month up to a total of 25% of the unpaid tax) with their return(s), the IRS is automatically refunding these penalties by way of refunds or credits, to the tune of more than $1.2 billion! Many of these payments will be completed by the end of September. Note that late-payment penalties do not qualify for this relief.
Still Time to Qualify
For those taxpayers who have still not filed the qualifying individual and corporate returns, there is still time to qualify for this penalty relief – but not much! Any eligible income tax return must be filed on or before Sept. 30, 2022!
Filers of various international information returns, such as those reporting transactions with foreign trusts, receipt of foreign gifts, and ownership interests in foreign corporations, can also qualify for penalty relief. But the returns must be filed on or before Sept. 30, 2022!
Other Items of Note
The IRS is also providing penalty relief to employers and businesses who filed 2019 and 2020 information returns, i.e. 1099s, late. To qualify for relief, eligible 2019 returns must have been filed by Aug. 3, 2020, and eligible 2020 returns must have been filed by Aug. 2, 2021.
Penalty relief is not available in some situations, such as where a fraudulent return was filed or where the penalties were part of an agreement with the IRS.
Tax Considerations on Student Loan Forgiveness
It has been confirmed by the Biden administration that the student loan forgiveness announced recently, for up to $10,000 ($20,000 for Pell Grants), will not be taxable at the Federal (IRS) level for borrowers of the funds, due to a provision in the American Rescue Plan. This relief is available to borrowers with individual incomes below $125,000 (or $250,000 if married filing jointly.)
It has been noted that 13 states may treat the forgiven debt as taxable income, based on an initial reading of their tax codes, among them New York, Pennsylvania and Massachusetts. However, it remains to be seen how these states will actually end up treating these amounts.
