By: Mike Nelson, CPA, CFE, CVA
In a significant move to assist individuals, businesses, and tax-exempt organizations with outstanding tax obligations, the Internal Revenue Service (IRS) has announced new penalty relief for approximately 4.7 million entities that were not sent automated collection reminder notices during the pandemic. This relief, totaling about $1 billion, is aimed at those who make under $400,000 a year (IR-2023-244, Dec. 19, 2023).
Background
Due to the unprecedented challenges posed by the COVID-19 pandemic, the IRS temporarily halted the mailing of automated reminders to pay overdue tax bills from February 2022. While these reminders were suspended, the failure-to-pay penalty continued to accrue for those who did not fully pay their bills in response to the initial notice.
To address this situation, the IRS is taking proactive steps before resuming normal collection notices for tax years 2020 and 2021. The agency will issue special reminder letters to taxpayers starting next month, providing information on their liabilities, easy payment options, and the amount of penalty relief, if applicable.
Penalty Relief Details
The IRS estimates that 5 million tax returns, filed by 4.7 million individuals, businesses, trusts, estates, and tax-exempt organizations, are eligible for penalty relief. This represents $1 billion in savings to taxpayers, averaging about $206 per return. Adjustments to eligible individual accounts have already begun, with further adjustments for business accounts and other entities scheduled through early 2024.
This penalty relief is automatic, requiring no action from eligible taxpayers. It applies to those with assessed tax under $100,000 for tax years 2020 and 2021. Taxpayers who already paid their full balance will also benefit, receiving a refund or credit toward another outstanding tax liability.
Resumption of Collection Notices
The IRS will resume sending automated collection notices in 2024, starting with individuals with tax debts prior to tax year 2022 and businesses, tax-exempt organizations, trusts, and estates with tax debts prior to 2023. The pause in collection mailings affected only follow-up reminder mailings, not the initial balance due notices.
To assist taxpayers with long-standing tax debt who may not have received a formal letter or notice in more than a year, the IRS will issue a special reminder letter starting next month. This letter will serve as a precursor to more serious steps in the tax collection process, providing taxpayers an opportunity to address the issue before further action is taken.
Assistance for Taxpayers
The IRS emphasizes the availability of payment options and online tools to help taxpayers with unpaid tax debts. Options include setting up automatic payment plans and catching up with tax filings. New self-help tools, improved phone service with callback features, and the IRS Online Account are part of ongoing efforts to assist taxpayers.
Important Dates & Additional Information
The failure-to-pay penalty relief is applicable until April 1, 2024, after which it will resume for eligible taxpayers. Taxpayers with questions on penalty relief can contact the IRS after March 31, 2024.
The IRS urges taxpayers to carefully read any letter or notice they receive before calling the agency. For those not eligible for automatic relief, existing penalty relief procedures, such as the reasonable cause criteria or the First-Time Abate program, are available.
Taxpayers can expect the resumption of automated collection notices in stages starting in January 2024, with gradual issuance to ensure taxpayers have ample time to seek assistance. The IRS will continue its efforts to provide support and options for those facing tax-related challenges. Contact your KPM advisor with questions.