IRS penalty relief Archives - The Free Financial Advisor

Paid IRS Penalties During the Pandemic? You May Be Able to Get Some Money Back — A taxpayer reviews an old IRS notice and tax account for possible COVID-era penalty relief, including refunds or credits for certain eligible 2020 and 2021 penalties – Shutterstock

The pandemic created a spectacular mess of ordinary life, and taxes did not exactly escape the chaos. If you paid certain IRS penalties tied to your 2020 or 2021 taxes, you may qualify to get that money back through automatic penalty relief the IRS announced after the worst of the disruption had passed.

Not every pandemic-era tax penalty qualifies, and it certainly does not mean the IRS will send a check simply because the calendar once contained the word 2020. The relief comes with specific rules about the tax year, type of penalty, tax amount, and IRS notices, so checking the details matters before counting that refund money as found cash.

The IRS Gave Some Pandemic Penalties a Second Look

The IRS created special relief for certain taxpayers who faced failure-to-pay penalties for tax years 2020 and 2021. Under Notice 2024-7, the agency agreed to waive eligible penalties and refund or credit penalties that taxpayers had already paid.

The automatic relief generally covers individuals, businesses, estates, trusts and certain tax-exempt organizations that filed qualifying returns and had assessed tax below $100,000 for the applicable year. For individuals, qualifying returns generally include Form 1040-series returns, while certain businesses and organizations qualify through other specified forms.

The timing of the IRS notice also matters, because the automatic relief targeted taxpayers who received an initial balance-due notice, generally a CP14 or CP161, between February 5, 2022, and December 7, 2023. The IRS designed the program around taxpayers who entered the collection process after the agency temporarily paused certain collection notices during the pandemic.

If a taxpayer already paid the eligible penalty, the IRS can apply the money toward another outstanding federal tax liability or issue a refund when no other balance remains. In other words, a taxpayer who already handed over the money did not necessarily lose the chance to benefit from the relief.

Not Every Pandemic-Era Penalty Qualifies

Here comes the fine print, because taxes always seem to keep a tiny trapdoor hidden beneath the carpet. The 2020 and 2021 automatic relief primarily addresses certain failure-to-pay penalties, not every penalty that appeared on an IRS account during those years.

The IRS also offered separate relief under Notice 2022-36 for certain failure-to-file penalties involving eligible 2019 and 2020 returns filed by September 30, 2022. That program also allowed eligible penalties that taxpayers had already paid to receive refunds or credits, but the filing deadline for that particular relief has long since passed. That means a taxpayer should not lump every old IRS charge into one big “COVID penalty” bucket. A failure-to-file penalty, failure-to-pay penalty, estimated-tax penalty, and other IRS charges can follow different rules, and the notice attached to the charge can reveal exactly what happened.

There are also exclusions from the automatic 2020 and 2021 relief, including situations involving assessed tax of $100,000 or more and certain cases involving fraud, accepted offers in compromise, closing agreements or court-determined penalties. Taxpayers outside the automatic program may still qualify for other forms of penalty relief, including reasonable-cause relief or the First-Time Abate program, depending on their circumstances.

So, before celebrating over a hypothetical IRS windfall, identify the exact penalty first. A five-minute review of the tax account can prevent a lot of unnecessary optimism.

How to Check Whether the IRS Owes You

The easiest starting point involves the taxpayer’s IRS Online Account and tax records. The IRS says taxpayers can review account information and transcripts to see details connected to the penalty relief, which can help determine whether the agency already adjusted the account.

Look for an IRS notice or account entry showing an adjustment, refund or credit connected with the affected tax year. If another federal tax balance exists, the IRS may apply the money to that balance instead of sending a separate check, so a missing check does not automatically mean the relief disappeared.

A taxpayer who changed addresses should pay particular attention to the mailing information on file. The IRS notes that taxpayers may need to update their address to receive refunds or notices, and the agency generally mails a refund when the taxpayer did not request direct deposit on the original return.

If the account does not make sense, the next step involves contacting the IRS or reviewing the original penalty notice rather than guessing. Keep copies of the return, IRS notices, payment records and account information handy, especially when a taxpayer needs to challenge a penalty that falls outside the automatic program.

And there is one reassuring detail: eligible taxpayers did not need to submit a special application for the automatic 2020 and 2021 relief. The IRS handled that relief automatically, although taxpayers still need to pay attention to later notices and respond to unrelated tax issues when required.

The Old Tax Bill Could Still Have One More Surprise

For anyone who paid an eligible pandemic-era penalty, checking the IRS account could uncover money that never felt like a refund because the agency used it as a credit. That makes this less of a “wait for a mysterious check” situation and more of an account-reconciliation exercise. The IRS specifically says it can credit previously paid penalties toward another outstanding tax liability or issue a refund when appropriate.

The bigger lesson involves keeping old tax records even after the annual filing frenzy fades. Tax problems can linger for years, and an old IRS notice can suddenly become important when the agency changes how it handles a particular penalty. If the automatic relief does not cover the penalty, that does not necessarily end the conversation. The IRS allows certain taxpayers to request penalty relief based on reasonable cause, and taxpayers may qualify for First-Time Abate in appropriate circumstances.

In short, a pandemic-era IRS penalty deserves a second glance before it gets forgotten in the filing cabinet forever. If an eligible penalty already drained money from the household budget, the IRS may have an adjustment waiting that puts at least some of it back where it belongs.

Did you pay an IRS penalty during the pandemic and later discover that you qualified for penalty relief, or did the IRS automatically refund or credit the money? Share what happened in the comments.

Request Abatement When a Serious Event Disrupted Your Tax Obligations

The IRS may grant reasonable-cause relief when a taxpayer exercised ordinary care and prudence but still could not file or pay on time. The agency reviews the facts and circumstances of each case, so the details matter far more than a vague explanation that says, “Things got complicated.”

A serious illness, incapacitation, natural disaster, fire, death in the immediate family or another event beyond a taxpayer’s control may support a request. A taxpayer who spent weeks in the hospital, for example, faces a much different situation from someone who simply forgot a deadline while juggling ordinary household responsibilities. The IRS wants to know what happened, when it happened, how it prevented timely compliance and what steps the taxpayer took to fix the problem.

Documentation can make the request much stronger. Medical records, court documents, disaster documentation, correspondence, receipts and other records may help show the timeline and the taxpayer’s efforts to comply. The goal involves telling a clear factual story, not writing a dramatic courtroom monologue with a tax return as the villain.

Check for First Time Abate Before Building a Bigger Case

Taxpayers with a strong recent compliance history may qualify for First Time Abate, a form of administrative relief for certain failure-to-file, failure-to-pay and failure-to-deposit penalties. Traditionally, the IRS has looked at timely compliance during the prior three years, along with other eligibility requirements.

This option matters because a taxpayer may not need to prove a medical emergency, natural disaster or other extraordinary event to request relief. During the transition to the IRS’s new Automatic Exemption from Penalty program, eligible taxpayers may still need to contact the IRS to request First Time Abate for certain returns and periods. The IRS says the new automatic program will replace First Time Abate for eligible original returns with due dates on or after January 1, 2027.

A taxpayer who receives a penalty notice should therefore check the compliance history before assuming the bill represents the final word. The IRS may apply First Time Abate if the taxpayer meets the requirements, even when the taxpayer initially calls about reasonable cause. That makes a quick review of the notice and prior filing history a much better move than immediately accepting the penalty as unavoidable.

Do Not Confuse a Cash Crunch With Automatic Reasonable Cause

A lack of money alone generally does not qualify as reasonable cause for failing to pay a tax bill. The IRS may consider other facts that show a taxpayer exercised reasonable care and tried to comply, but simply saying, “There was not enough money in the account,” usually does not settle the matter.

That does not mean a taxpayer should ignore the bill because full payment feels impossible. Paying what can be paid and exploring a payment plan may reduce future penalties and keep the situation from growing teeth. The IRS specifically advises taxpayers who cannot pay their full tax and penalty balance to pay as much as possible and consider a payment plan.

The timing also matters. A taxpayer who quickly files a late return, makes a good-faith payment and takes steps to correct the problem can create a stronger factual record than someone who lets the issue sit untouched for months. Penalty abatement does not erase the underlying tax, and interest may continue to apply to unpaid tax and penalties, so delay rarely improves the situation.

Request Relief Through the Right Channel and Bring the Details

The IRS says some penalty relief requests may begin by phone using the number listed on the notice or letter. Taxpayers should have the notice, the specific penalty, the reason for requesting relief and any supporting documentation available before making the request.

If the IRS cannot approve the request by phone, a taxpayer may request relief in writing, including through Form 843, Claim for Refund and Request for Abatement, when appropriate. A written request should explain exactly what happened, identify the relevant dates, describe how the event prevented timely filing or payment and explain the steps taken to correct the problem. A short, organized timeline often works better than several pages of emotional frustration.

Taxpayers should also avoid making claims that the records cannot support. “The accountant handled everything” may not automatically excuse a taxpayer, especially if the taxpayer failed to provide accurate information or ignored warning signs. On the other hand, documented reliance on competent professional advice may matter in certain circumstances, depending on the facts and the penalty involved.

A Denial Does Not Always End the Conversation

The IRS may deny a penalty-abatement request, but taxpayers who receive a denial letter may have appeal rights. The IRS generally gives eligible taxpayers 30 days from the date of the rejection letter to request an appeal, although the specific notice controls the deadline and instructions.

That deadline deserves attention because tax notices rarely improve with age. A taxpayer should review the denial, gather the relevant documentation and follow the appeal instructions instead of tossing the letter into a drawer marked “future problem.” If the case involves substantial money or complicated tax issues, professional tax advice may make sense.

The broader lesson involves acting quickly and documenting carefully. IRS penalty abatement does not offer a magic eraser for every tax mistake, but it can provide meaningful relief when a taxpayer qualifies under reasonable-cause rules, administrative programs or other legal exceptions. When a penalty notice arrives, the best first step involves checking the reason for the penalty and the available relief options before assuming the balance cannot change.

The Tax Bill May Not Be the Final Number

Penalty abatement makes the most sense when a taxpayer has a specific, supportable reason for relief and takes action promptly. A strong request connects the facts to the missed obligation, shows the taxpayer acted responsibly and includes records that support the explanation. (irs.gov)

The smartest move involves more than simply asking the IRS to “please remove the penalty.” Check whether First Time Abate or the newer Automatic Exemption from Penalty rules apply, consider reasonable cause when circumstances support it and remember that a payment plan may help when the underlying tax remains unpaid. A penalty notice can feel final, but in some situations, it marks the beginning of a conversation rather than the end of the story.

Has the IRS ever added a penalty to a tax bill, and did you request relief or simply pay it?

Paid IRS Penalties During the Pandemic? You May Be Able to Get Some Money Back