IRS Announces Unprecedented Penalty Relief, Waiving Nearly $1 Billion for Millions of Taxpayers

IRS Announces Unprecedented Penalty Relief, Waiving Nearly $1 Billion for Millions of Taxpayers

Edited by: TJVNews.com

In a groundbreaking move, the Internal Revenue Service (IRS) has announced a significant incentive for Americans who owe back taxes, opting to waive nearly $1 billion in late-payment penalties. As was reported by the Wall Street Journal, the initiative aims to provide relief to approximately 4.6 million individual taxpayers burdened by outstanding tax obligations for the years 2020 and 2021. This unprecedented decision comes in the wake of the IRS’s suspension of collection letters during the pandemic, a pause that inadvertently contributed to a growing debt crisis among taxpayers, the WSJ report added.

The IRS had temporarily ceased sending out computer-generated collection letters as part of its pandemic response, intending to alleviate the financial strain on struggling taxpayers and reduce the agency’s backlog, the WSJ report said. However, the unintended consequence was a significant lack of communication regarding outstanding tax liabilities, leaving many Americans unaware of the escalating interest and penalties accumulating on their unpaid back taxes.

IRS Commissioner Danny Werfel expressed concern, stating, “We have been concerned about taxpayers who haven’t heard from us in a while suddenly getting a larger tax bill,” according to the WSJ report. The resumption of collection notices for the 2022 tax year this fall prompted the IRS to address the issue and offer a unique solution.

Tax preparers have characterized the IRS’s decision as unprecedented. Jim Buttonow, a certified public accountant with nearly two decades of experience in IRS compliance, called it a “gift,” emphasizing that the absence of a notice would not typically warrant penalty relief, as was indicated in the WSJ report. This move reflects the IRS’s acknowledgment of the challenges taxpayers faced during the pandemic and the agency’s commitment to easing their financial burdens.

The penalty relief applies to individual taxpayers who owe less than $100,000 in taxes for the years 2020 or 2021 and received an initial balance due notice on or before December 7, 2023, according to the report in the WSJ. To avail of this relief, eligible taxpayers must settle their debts by April 1, 2024. The WSJ report added that the IRS will issue special notices in early January 2024, reflecting the revised balances due. Taxpayers who have already paid the penalties will receive refunds or credits on their IRS accounts as early as this week.

As of year-end 2022, the IRS reported that 18.6 million individual taxpayers owed a staggering $316 billion in overdue taxes, representing an increase from 16.8 million owing $308 billion in September 2019, as per the WSJ report. One contributing factor to this surge is the changing dynamics for many Americans who, accustomed to receiving tax refunds, are now finding themselves with balances due.

CPA Logan Allec in Los Angeles highlighted the challenge of taxpayers forgetting about their debts when not prompted by IRS notices, emphasizing that interest and penalties continued to accrue even when collection letters were on hold, the report in the WSJ said. Importantly, the IRS cannot waive the interest, as it is mandated by law.

For those who fall behind on their tax payments, the penalties can be substantial. The penalty for failure to pay is 0.5% of the unpaid balance each month, amounting to 6% annually. The report in the WSJ also said that this penalty, however, can accrue up to a maximum of 25%. In the case of taxpayers entering into an IRS payment plan, the penalty is reduced to 0.25% per month or 3% annually. Even with this reduction, E. Martin Davidoff, a CPA and tax lawyer, notes that taxpayers could still be paying about 11% on an annual basis, according to the WSJ report.

During the pause on automatic notices, IRS enforcement continued, albeit at a slower pace. Notices of federal tax liens and passport-revocation letters are being sent for taxpayers owing more than $59,000, the report added.  Revenue officers are prioritizing high-income, high-wealth collection cases, targeting those with debts exceeding $250,000.

Soft notices, such as the CP14 notices and annual balance due reminders, were still issued. However, more aggressive notices like the CP500 series and the LT11, the final notice of intent to levy, were temporarily halted, as was noted in the WSJ report. Notably, the CP504 notice, which warns of property seizure, wasn’t being sent out.

As the IRS resumes its collection efforts, taxpayers facing tax debt are encouraged to be proactive in addressing their financial obligations. Understanding the penalties, exploring relief options, and considering self-help measures are crucial steps towards managing tax debt effectively, the WSJ reported. Seeking professional advice and taking IRS notices seriously can significantly contribute to navigating the complexities of the tax system and achieving financial stability.

While providing much-needed relief for eligible taxpayers, the move also underscores the broader challenges faced by individuals navigating a complex tax landscape, especially in the wake of unprecedented global events. As the IRS resumes its communication efforts in January 2024, the impact of this relief and the agency’s ongoing commitment to taxpayer support will be closely monitored.