IRS Issues Notice 2022-36 Providing Relief to Certain Taxpayers Filing Late Returns

On August 24, 2022, the Internal Revenue Service (“IRS”) released Notice 2022-36, which provides relief for eligible taxpayers from failure to file penalties for specified tax returns for the 2019 and 2020 tax years that are filed on or before September 30, 2022.  The Department of the Treasury and the IRS previously postponed the due dates for filing certain income tax returns in response to the COVID-19 pandemic.  However, taxpayers who failed to timely file a tax return by the postponed due date were liable to pay certain penalties under the rules of the Internal Revenue Code (the “Code”).  The Department of the Treasury and the IRS determined that the penalty relief granted in Notice 2022-36 allows the IRS to focus its resources more effectively for the 2023 filing season while also providing additional relief to taxpayers impacted by the COVID-19 pandemic.

Notice 2022-36 references certain penalties that will not be imposed if such tax returns are filed on or before September 30, 2022.  For example, Section 6651(a)(1) of the Code generally imposes an addition to tax for a failure to timely file the Form 1040, U.S. Individual Income Tax Return, or the Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation.  Sections 6698(a)(1) and 6699(a)(1) generally impose a penalty for the failure of any partnership to timely file the Form 1065, U.S. Return of Partnership Income, or Form 1120-S, U.S. Income Tax Return for an S Corporation, respectively. 

The penalty relief granted in Notice 2022-36 extends to individuals, certain tax-exempt organizations, partnerships, and S corporations who file the specified tax returns for taxable years 2019 and 2020 on or before September 30, 2022.  The penalties specified in Notice 2022-36 will be automatically abated, refunded, or credited without any action by the affected taxpayer.  The penalty relief described in Notice 2022-36 does not apply to any taxable years not mentioned or any penalties that are not specifically listed in the grant of relief under Notice 2022-36.  Notice 2022-36 does not apply to the specified tax returns for 2021 or for taxable years on or before 2018.  Thus, taxpayers must timely file these tax returns or else those penalties will be imposed. 

To illustrate the importance of Notice 2022-36, if a hypothetical private foundation was incorporated in 2019 and did not submit its application for tax-exempt status until 2020, such hypothetical private foundation must file a Form 990-PF in 2019, the year of its incorporation, even if it had zero assets and was not approved as a tax-exempt entity in that year.  If this hypothetical private foundation never filed its Form 990-PF in 2019 or 2020, that private foundation would be liable for the penalty imposed under Section 6651(a)(1) for each of those years, unless it could show reasonable cause.  If a private foundation whose gross receipts are less than $1,000,000 for its tax year files a late Form 990-PF, the maximum penalty for any late return is generally the lesser of $10,500 or 5% of the organization’s gross receipts for the year.  If the hypothetical private foundation files its Form 990-PF’s for the years 2019 and 2020 by September 30, 2022, then it would be eligible for relief under Notice 2022-36 and would not pay the Section 6651(a)(1) addition to tax penalty for those years. 

As noted above, the penalty relief only applies to those penalties mentioned in Notice 2022-36.  There are other potential penalties applicable to a private foundation who does not timely file its Form 990-PF or pay any taxes.  Under Section 6651(a)(2), an organization that does not pay taxes when due is charged a penalty of ½ of 1% of the unpaid tax for each month or a part of the month that the tax is not paid for a maximum of 25% of the unpaid tax.  Under Section 6652(c)(1)(B), there is also a penalty owed by the responsible person(s) of an organization.  If the IRS makes a written demand that a delinquent return be filed within a reasonable time period, and the organization does not file a return in the required time period, the person failing to comply with the demand must pay a maximum of $5,000 for each delinquent return.  If more than one person is liable for any failures, all such persons are jointly and severally liable for such failures.  Notice 2022-36 does not include Sections 6651(a)(2) or 6652(c)(1)(B) as certain penalties eligible for relief.  Thus, the aforementioned hypothetical private foundation which files its Form 990-PF’s for the years 2019 and 2020 by September 30, 2022 would remain potentially liable for penalties discussed in Sections 6651(a)(2) and 6652(c)(1)(B).

The IRS provided taxpayers and their tax counsel notice of approximately one month prior to the September 30, 2022 filing deadline.  The impetus is now on taxpayers to act swiftly in order to take advantage of the relief granted under Notice 2022-36.  For more information on how to apply for relief under Notice 2022-36, please contact Devon Goldberg or the Tax Planning department’s attorneys at Comiter, Singer, Baseman & Braun, LLP at (561) 626-2101.