Reminder: The Penalty Tax Refund Deadline Is This Week

People hit with late-filing penalties during the pandemic could be getting a tax refund from the IRS – if they act now.

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Time may be running out for people who qualify for a chunk of the $1.2 billion in tax refunds owed to taxpayers who paid penalties for late tax returns in 2020 and 2021. The IRS is trying to get the refund payments out the door quickly so it can start prepping for the upcoming tax season and continue working on its backlog of unprocessed tax returns. As a result, it set a tight deadline for filing the underlying tax return – and that deadline is this week!

Why Are Bonus Tax Refunds Being Sent?

The COVID-19 pandemic really messed up the 2020 and 2021 tax return filing seasons. You couldn't meet with your accountant face-to-face, IRS employees weren't answering the phones, new COVID-relief laws required tax form changes, and other odd twists and turns just made things more confusing and difficult at tax time. To give people and businesses a little more time to sort through the chaos, the IRS pushed back the tax return filing deadlines in 2020 and 2021. But that wasn't enough help for everyone. Some taxpayers still filed their tax return late and were hit with an IRS penalty for it. However, the good news is that some of those people and businesses are getting additional tax relief now. And you don't have to do anything to get it – the IRS will automatically send it to you if you satisfy all the requirements.

Not everyone who received an IRS penalty notice during the pandemic will get a refund, though. This new tax relief measure only applies to certain penalties assessed for specific types of tax returns. And, of course, if you were hit with a qualifying penalty but didn't actually pay it, you won't receive a refund check from the IRS (although you'll no longer owe the penalty to the government).

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General Penalty Refund Requirements

A few requirements must be satisfied before a refund payment will be issued. First, tax refunds will only be sent for late filing penalties associated with tax returns for the 2019 and 2020 tax years that were due in 2020 and 2021, respectively. So, for example, you're out of luck if you were hit with a penalty for filing your 2018 tax return after the due date. There's no relief if you missed this year's tax filing deadline, either.

Second, refunds and abatement of late filing penalties only applies to certain types of tax returns. The 1040 series of returns that individuals file is on the list (i.e., Forms 1040, 1040-C, 1040-NR, 1040-NR-EZ, 1040 (PR), 1040-SR, and 1040-SS). Income tax returns for general estates and trusts (Form 1041), Alaska Native Settlement Trusts (Form 1041-N), and qualified funeral trusts (Form 1041-QFT) qualify, too.

Late filing penalties associated with various corporate income tax returns qualify for refunds as well (e.g., Form 1120 series). Penalty relief is also available to employers and other businesses that filed certain information returns late (e.g., 1099 forms). The IRS says that penalty refunds may also be sent to taxpayers who filed of various international information returns, such as those for reporting transactions with foreign trusts, receipt of foreign gifts, and ownership interests in foreign corporations.

Third, in most cases, the tax return in question must be filed no later than September 30, 2022 – that's the deadline you need to worry about this week! So, if you're still waiting to file your return, now is the time to act if you want your penalty to be erased.

(Note: When it comes to penalty relief for the domestic information returns, the September 30 due date doesn't apply. Instead, eligible 2019 returns must have been filed by August 3, 2020, while eligible 2020 returns must have been filed by August 2, 2021.)

Penalties That Won't Be Refunded

Tax refunds and penalty abatement are only available for the late filing penalty, which is 5% of the tax due for each month (or part of a month) your return is late, up to a maximum penalty of 25%. Relief is not available for other penalties, such as the late payment penalty or interest paid.

No refunds or abatement is not available where a fraudulent return was filed. Relief also doesn't apply if a penalty is part of an accepted offer in compromise or a closing agreement, or where the penalty was finally determined in a court proceeding.

Will the September 30 Deadline Be Extended?

The IRS first announced the penalty relief on August 24. That only gives taxpayers a little more than five weeks to meet the September 30 deadline. Many affected taxpayers and tax professionals want more time. They don't think five weeks is enough time to get their documents in order and file the necessary tax returns. Several Republican lawmakers have even asked the IRS to push the deadline into November (opens in new tab).

It's always possible that the IRS will adjust the deadline at the last minute, but that appears to be very unlikely. So, if you're otherwise eligible for a penalty relief tax refund, don't delay the filing of your 2020 or 2021 tax return any longer hoping that the IRS will change course. Get it done ASAP and beat the September 30 deadline.

But, so far, the IRS hasn't budged. The agency already has a lot on its plate and wants to get these penalty relief refund payments out of the way as soon as possible. "We understand the concerns being raised by the tax community and others about the September 30 penalty relief deadline," said IRS Commissioner Chuck Rettig in a recent statement. "Given planning for the upcoming tax season and ongoing work on the inventory of tax returns filed earlier this year, this penalty relief deadline of September 30 strikes a balance. It is critical to us to not only provide important relief to those affected by the pandemic, but this deadline also allows adequate time to prepare our systems and our workstreams to serve taxpayers and the tax community during the 2023 filing season."

Rocky Mengle
Senior Tax Editor, Kiplinger.com

Rocky is a Senior Tax Editor for Kiplinger with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, he worked for Wolters Kluwer Tax & Accounting and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky has a law degree from the University of Connecticut and a B.A. in History from Salisbury University.