How to Avoid Penalties on 2019 and 2020 Unfiled Tax Returns

September 1, 2022By: TaxCure Staff
penalty relief 2022 irs

IRS Waives Late Filing Penalties for 2019 and 2020 Tax Returns, Prepares to Send $1.2 Billion in Refunds to Taxpayers

Do you have unfiled tax returns from 2019 or 2020? Right now, the IRS is letting taxpayers catch up without interest or penalties. This is an extremely rare opportunity, and it gives taxpayers the chance to save hundreds or even thousands of dollars in penalties and interest. But you need to act fast — you only have until September 30 to take advantage of this program. 

This penalty relief program can save you 25% or more on your tax bill. Keep reading for more details about this new form of COVID tax relief for people with unfiled returns.

IRS Waiving 2019 and 2020 Failure-to-File Penalties

If you file your 2019 or 2020 IRS tax returns by September 30, 2022, the IRS will waive the failure-to-file penalties. This applies to personal and business tax returns. The IRS is also offering penalty relief for many informational returns. 

Already incurred late filing penalties for 2019 or 2020? Don't worry. You still get relief. The IRS plans to retroactively refund late filing penalties for these years. If you have incurred late filing penalties for 2019 or 2020, the IRS will abate the penalties. The agency will send refund checks to people who have already paid these penalties. 

Penalty Relief for 2019 and 2020 Information Returns

The IRS is also offering retroactive penalty relief to businesses required to file informational returns, such as the 1099 forms. To get this relief, you must have filed your 2019 information returns by August 3, 2020. You must have filed your 2020 forms by August 2, 2021. 

Penalty Relief for Informational Information Returns

International information returns may also qualify for penalty relief. This includes returns for reporting transactions with foreign trusts, receipts of foreign gifts, and ownership interests in foreign corporations. To qualify, the returns must be filed by September 30, 2022. 

How Much Can You Save With 2019/2020 Penalty Relief?

If you take advantage of this offer, you will still have to pay your entire tax liability, but by removing the penalties and interest, you will save a lot of money. On individual and corporate income tax returns, you will reduce your overall bill by about 25% or more once you remove the penalties and interest. 

Failure-to-file penalties are 5% of the tax due, but they're assessed every month until they reach 25%. Because the deadline for 2019 and 2020 tax returns was well over a year ago, the failure-to-file penalty for both of these years has already reached the 25% mark. 

By taking advantage of this program, you avoid paying this expensive penalty. To give you an example, imagine your 2019 tax bill was $10,000. The failure-to-file penalty would be $2,500. Then, if your 2020 tax liability was $100,000, the late filing penalty would be $25,000. By filing by September 30, you avoid both of these penalties. 

How Much Interest Can You Save When You File by September 30, 2022?

If you file your 2019 or 2020 personal or business tax returns by September 30, 2022, the IRS will also remove the interest. The IRS's interest rate on unpaid taxes adjusts quarterly, and it is the short-term rate plus 3% for individuals and most businesses. It's the short-term rate plus 5% for large corporations. 

From 2019 to 2020, the interest rate for individuals and most businesses was 3 to 5%, and it compounded daily. If you file by September 30, 2022, the IRS will also abate the interest. 

Eligible Returns for 2019 and 2020 Penalty Relief

Both individual and business filers can get relief from 2019 and 2020 penalties. The IRS is offering penalty relief for tax years 2019 and 2020 on the following forms:

  • 1040 (U.S. Individual Income Tax Return)
  • 1120 (U.S. Corporation Income Tax Return)
  • 1120-S (U.S. Income Tax Return for an S Corporation)
  • 1065 (U.S. Return of Partnership Income)
  • 1066 (U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return)
  • 990-T (Exempt Organization Business Income Tax Return)
  • 990-PF (Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation)
  • 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations)
  • 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)
  • 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)

If you have an unfiled 1065 or 1120-S, the IRS is also offering relief on the penalties for failure to show information.

Exceptions to IRS COVID Penalty Relief

This penalty relief specifically applies to the failure-to-file penalty and interest associated with late-filed returns. It does not apply to the failure-to-pay penalty. 

To give you an example, imagine that Joe filed his 2019 return late and incurred a $1,000 penalty. The IRS will abate this penalty. Now let's say that Jane filed her 2019 return on time but she paid late and incurred a $200 late payment penalty. The IRS will not abate this penalty as part of its most recent COVID tax relief. However, the IRS may remove this penalty under one of its other programs. 

The IRS is not offering penalty relief in a few situations. In particular, you cannot get penalty relief for late 2019 or 2020 tax returns if you filed a fraudulent return, if the penalties were determined by a court, or if they were part of an accepted offer in compromise or a closing agreement. 

What If You Have Penalties That Are Not Eligible for Relief?

If your penalties are not eligible for relief under this program, you may still qualify for abatement. You need to apply using one of the IRS's other penalty abatement programs. The IRS generally provides penalty abatement for first-time penalties or for taxpayers who have reasonable cause. These penalty abatement programs are not automatic. You must apply for them. 

What About People Who Already Paid 2019 or 2020 Failure-to-File Penalties?

If you paid failure-to-file penalties on your 2019 or 2020 returns, the IRS will refund the penalties. The IRS plans to send about $1.2 billion in refunds to 1.6 million taxpayers. If you paid late filing penalties for these years, you don't have to contact the IRS. The agency plans to send out the refund automatically, and the majority will go out by the end of September. 

Why Is the IRS Offering Penalty Relief for Unfiled 2019 and 2020 Returns?

The IRS is offering relief to help taxpayers who were affected by COVID. Due to the pandemic and all of the issues related to the pandemic, many people were unable to file their 2019 or 2020 returns on time. This program helps to ensure these taxpayers didn't incur any unfair penalties or interest. 

The program is also designed to help the IRS get caught up. During the pandemic, IRS employees worked remotely, and administering the stimulus program placed extra burdens on the agency. As a result, the IRS developed a huge backlog of returns. Abating 2019 and 2020 late filing penalties means that the IRS can clear this issue and start focusing on the upcoming 2023 tax season. 

Get Help With Unfiled Returns

Ready to deal with your unfiled 2019 or 2020 returns? Then, it's time to reach out to a tax pro for help. Use TaxCure to search for a tax pro based in your area. They can help you file your 2019 or 2020 tax returns by September 30, 2022, so you can avoid penalties and interest.