IRS Coming for Unpaid 2020 and 2021 Taxes
Before Collection Actions Resume, Agency Offers $1 Billion in Penalty Relief
In January 2024, the IRS plans to start sending notices about unpaid taxes from 2020 and 2021. The agency stopped sending most automated collection letters during the COVID pandemic and through 2023. If you have unpaid taxes from 2020 or 2021, you may have thought that the IRS forgot about the bill. That is not the case, and collection actions are resuming.
However, here's the good news — the IRS is removing the failure to pay penalty from most unpaid 2020 and 2021 taxes.
What to Expect
If you have unpaid taxes from 2020 or 2021, the IRS will send you a reminder letter about your unpaid balance in early 2024. The letter will be labeled "LT38 Reminder, Notice Resumption". It will explain that the IRS is sending out automated collection letters again, and it should also show that the IRS has removed penalties from your account.
To avoid additional penalties on your account, contact the IRS to pay the tax due or set up a payment arrangement. If you don't make arrangements, the IRS will start adding penalties to the account on April 1, 2024.
Failure to pay penalties are between 0.5 and 1% of your balance. They apply monthly, and they can get up to 25% of your tax bill. For instance, if you owe $100,000, your late payment penalty can get up to $25,000.
How to Pay Taxes From 2020 and 2021
If you owe back taxes, the IRS offers the following repayment options. Consider contacting a tax pro to see which plan is the best for your situation.
- Installment agreements - Roll multiple years of unpaid taxes into a single payment plan. Then, make monthly payments until the debt is paid in full.
- Offer in compromise - Prove to the IRS that you can only pay part of the balance, make an offer, and then, if the IRS approves, pay off the debt for less than you owe.
- Partial payment installment agreement - If you can't afford the usual monthly payments and you can't make a lump sum offer in compromise, this hybrid program lets you make payments until a certain date. Then, the IRS writes off the rest of the tax debt.
- Currently not collectible - Show the IRS that you can't afford to pay anything. Then, they mark your account as uncollectible and they stop all enforced collections until your finances improve.
Generally, when you make arrangements with the IRS, they stop adding new penalties to your account or they reduce the penalty. For example, when you set up a payment plan, you'll incur a very small late payment penalty of .25% every month, but this is much lower than the penalty that applies if you aren't on a payment plan.
How to Get the IRS Penalty Relief for 2020 and 2021 Taxes
You don't have to do anything to get the penalty relief. In fact, if you're an individual who owes back taxes from 2020 or 2021, the IRS may have already applied the relief to your account. The IRS removed penalties from individual accounts first.
The agency plans to remove penalties from business accounts in late December and early January. The agency will remove penalties related to trusts, estates, and tax-exempt organizations in February and March 2024.
What If You Owe Taxes From Other Years?
If you owe back taxes from years prior to 2020, you also may not have received notices during COVID or throughout 2023. In that case, the IRS is going to start sending you notices again in 2024, but unfortunately, you don't qualify for this penalty relief.
Again, the agency will send you a reminder letter LT38. This notice tells you that the agency plans to resume collection notices. Then, a short while later, you will receive collection notices. If you don't pay, the notices will get increasingly worse, and eventually, the agency may send you a Final Notice and Intent to Levy. When that happens, they will move forward with seizing bank accounts, wages, and other assets.
Do All Unpaid 2020 and 2021 Taxes Qualify for Relief?
No, you can only qualify for the relief if your assessed tax from these years was $100,000 or less per return. Additionally, only individuals, businesses, trusts, estates, and tax-exempt organizations can qualify.
For example, if your 2020 tax return showed a balance due of $50,000 and your 2021 return showed a tax bill of $60,000, you would qualify because the assessed tax from each year was less than $100,000.
How to Tell if the IRS Removed Penalties From Your Account
If you haven't received a notice yet, you can check out the situation by looking at your online IRS account. Setting up an online account takes about 15 minutes, and once you're in, you can see your tax bills from different years as well as info about interest and penalties. A tax pro can also help you with this process.
What If You Don't Qualify for This Penalty Relief?
If you don't meet the criteria to get the IRS's automatic penalty relief, you should look into other options. The agency regularly removes penalties for people who are usually compliant but filed late for the first time in four years. The agency also offers penalty relief for reasonable cause which applies when a serious event such as an illness, death, or natural disaster causes you to file your taxes late.
What About Unfiled Returns?
If you have unfiled returns from 2020 or 2021, you may qualify for some relief. If the IRS issued a substitute for return and assessed tax against you, the agency will remove any failure to pay penalties that you have incurred (as long as the assessed tax from each return is $100,000 or less). If the agency hasn't assessed your tax, you haven't incurred these penalties yet.
However, when you catch up on filing, you will incur late filing penalties and failure to file penalties. These penalties are based on your tax debt, so the IRS can't calculate them until you file your return. When that happens, the IRS backdates the penalties to the original due date. To minimize those penalties as much as possible, consider filing your taxes ASAP before the IRS starts assessing the failure-to-pay penalty again in April.
Also, note that if you have a refund due to you from 2020, you must claim it by May 17, 2024. If you have a refund due from your 2021 tax return, you must claim it by April 15, 2025. The IRS only sends out tax refunds if you file within three years of the due date.
Why Is the IRS Removing $1 Billion in Penalties?
The IRS wants to be reasonable. The agency understands that COVID was unprecedented, and many people didn't have the time, money, or energy to pay their tax bills. To help, the agency is removing penalties as explained above. About 70% of the penalty abatement goes to people who earn less than $100,000 per year.
If you have unpaid taxes from 2020 and 2021, the IRS is going to automatically remove the late payment penalties from your account. These penalties will start applying to accounts again in April 2024. If you don't make arrangements to pay your tax debt by that time, the IRS may also start enforcing collection actions such as seizing your wages, bank accounts, or other property.
How to Get Help
Ready to set up payments on your 2020 or 2021 tax bill? Want to see if you qualify to settle for less than you owe? Need help to file late returns from these periods? Then, use TaxCure to find a local tax professional in your area.
Why go local? A local CPA, tax attorney or Enrolled Agent will look closely at your unique situation, and they'll help you find a lasting solution that truly works with your budget. They also know the ins and outs of your state revenue agency, which is invaluable if you owe money to the state as well as to the IRS.
In contrast, the big firms that dominate the tax relief industry are known for providing subpar, generalized services at inflated prices — unfortunately, the worst tax relief firms are generally the big companies, while small local firms provide the personalized service you really need to solve your tax problems.