Taxes in your practice: IRS penalty relief and ERC disclosure program

Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City.

Penalty relief 

IRS announcement 2023-244 (Dec. 19, 2023) provides background and information on new penalty relief for taxpayers affected by the pandemic and refers taxpayers to IRS notice 2024-7 for further details.

The announcement promises new penalty relief for approximately 4.7 million individuals, businesses, and tax-exempt organizations that were not sent collection reminder notices during the pandemic.

The IRS expects to provide about $1 billion in penalty relief, with most of the relief provided to taxpayers that have income of less than $400,000 per year. The IRS also indicated that nearly 70% of the individual taxpayers receiving relief have income of less than $100,000 per year. 

As background, starting in February 2022, the IRS temporarily suspended mailing of automated reminders for overdue taxes that normally would be issued following initial notices of a balance due. Even though the reminder notices were suspended, failure-to-pay penalties continued to accrue on unpaid taxes after issuance of initial balance due notices. 

As the IRS now resumes normal notice and collection processes for the 2020 and 2021 tax years, it is taking several steps to help taxpayers with unpaid tax bills, including some taxpayers who have not received any notices from the IRS in more than a year. 

The IRS will be issuing a special reminder letter to alert taxpayers of their liability, options for payment, and the amount of any applicable penalty relief.

As part of this process, the IRS will waive failure-to-pay penalties for eligible taxpayers affected by the pandemic for tax years 2020 and 2021. This will include adjusting individual; business; and trust, estate, and tax-exempt organizations accounts, in that order. Some of the adjustments may already have occurred, but others may not be processed until March 2024. 

The penalty relief is automatic, so eligible taxpayers should not have to apply or take any action to receive relief. For taxpayers that already paid failure-to-pay penalties for 2020 and 2021 tax years that would have been eligible for relief, the IRS will issue a refund or credit the payment to other outstanding tax liabilities. 

This penalty relief only applies to eligible taxpayers. Eligible taxpayers include individuals, businesses, trusts, estates, and tax-exempt organizations that filed applicable tax returns for tax years 2020 or 2021 with an assessed tax of less than$100,000 as of Dec. 7, 2023, and that were in the IRS collection notice process or were issued an initial balance due notice between Feb. 5, 2022, and Dec. 7, 2023. The IRS indicates that this $100,000 limit applies separately to each return and each entity. Notably, the relief is not available for any return to which a fraud penalty applies. The relief also does not apply to penalties resolved through offers in compromise, closing agreements, or final determinations in judicial proceedings.

The “relief period” identified in the notice begins on the later of the date of the initial balance due on Feb. 5, 2022, and ends on March 31, 2024. Failure-to-pay penalty assessments will resume on April 1, 2024, for taxpayers eligible for relief. Eligible taxpayers will remain liable for failure-to-pay additions that accrued before or after the relief period. 

Individual and business taxpayers should see this automatic relief as a refund or credit on their IRS transcript. For additional questions regarding this penalty relief, you can contact the IRS after March 31, 2024, presumably after the automatic processes are complete. 

The IRS announcement also encourages taxpayers that are not eligible for this automatic relief to consider other options. They may be able to obtain penalty relief by applying under reasonable cause criteria or the first-time abate program. The announcement directs taxpayers to seek additional information on these programs at IRS.gov/PenaltyRelief.

ERC Voluntary Disclosure Program 

IRS announcement 2024-3 outlines a Voluntary Disclosure Program for certain employers to resolve erroneous claims or refunds resulting from participation in the Employer Retention Credit program. 

The ERC is a refundable credit intended to assist businesses and tax-exempt organizations that continued paying employees during the pandemic. It generally applies to employers whose operations were suspended due to a government order, experienced a decline in gross receipts, or were a recovery startup business during applicable eligibility periods. 

The IRS has concerns about scams and potential fraud relating to ERC claims based on false and misleading public advertisements and solicitations. Taxpayers that have erroneously received the ERC could face assessment and collection enforcement action from the IRS. The IRS expects to prevail in any assessments and litigation imposing penalties and interest in these circumstances. However, in the interest of “efficient tax administration,” the IRS announced this Voluntary Disclosure Program for taxpayers to avoid potential assessments, litigation, penalties, and interest. 

The Voluntary Disclosure Program allows participants in the ERC to finally settle the ERC for purposes of employment tax obligations by eliminating their eligibility for the ERC but allowing them to retain 20% of the claimed ERC amount and avoid penalties and interest. Since the ERC reduces income tax expenses for qualified wages, the program also resolves the issue of corresponding adjustment to income tax expense for participants. The program requires the participant to acknowledge they are not eligible for the ERC for the periods at issue and remit 80% of the claimed ERC. The participant also must provide preparer and advisor information with respect to submission of the ERC claim, if they were assisted by a third party in making the claim. 

The program is available to any participant that has received an ERC credit or refund, provided that (1) the participant is not under criminal investigation; (2) the IRS has not already received or acquired information related to the participant’s noncompliance; (3) the participant is not under an employment tax examination for the tax periods relating to the program; and (4) the participant has not previously received a demand for repayment of all or part of the ERC claimed. 

Conclusion 

The recent IRS announcements on penalty and ERC relief reflect an effort to get IRS processes back to “normal” after pandemic administrative changes and pandemic relief programs. The IRS positions may be helpful to many taxpayers as they work toward compliance after the pandemic.