The Notice 2022-36 Relief from International Return Penalties

Notice 2022-36 Relief from International Return Penalties

The Internal Revenue Service will sometimes issue a published Notice to Taxpayers, identifying certain aspects of how it will proceed on matters involving the assessment and enforcement of penalties. Recently, in mid-2022, the IRS published Notice 2022-36 which provides a roadmap on how the IRS will avoid and/or abate certain penalties for Taxpayers who filed late 2019 and 2020 tax returns. One very important aspect of the notice is that it only involves tax years 2019 and 2020 and it only impacts the failure to report certain forms (for example FBAR and FATCA Form 8938 are not impacted by the notice). Let’s walk through the basics of IRS Notice 2022-36:

Section 1. Purpose

• • • “This notice provides relief for certain taxpayers from certain failure to file penalties and certain international information return (IIR) penalties with respect to tax returns for taxable years 2019 and 2020 that are filed on or before September 30, 2022. This notice also provides relief from certain information return penalties with respect to taxable year 2019 returns that were filed on or before August 1, 2020, and with respect to taxable year 2020 returns that were filed on or before August 1, 2021.

    • The relevant penalties will be waived or, to the extent previously assessed, abated, refunded, or credited, as described in section 3.A of this notice. Situations where penalty relief does not apply are described in section 3.B of this notice.”

It means for Taxpayers who properly file tax returns in accordance with the specified timelines, the IRS will provide relief from certain penalties (either waiving or abatement procedures).

Section 2. Background

The following is a general breakdown of the different code sections impacted by the Notice:

• • • “Section 6651(a)(1) of the Internal Revenue Code (Code) generally imposes an addition to tax for a failure to file (on or before the date prescribed) a tax return that is required under the authority of subchapter A of chapter 61 (other than part III regarding 2 information returns) of the Code, including certain income tax returns.1 Section 6038 generally imposes a penalty for the failure of certain United States persons to furnish (on or before the date prescribed) certain information with respect to a controlled foreign corporation or a controlled foreign partnership that the person owns.

    • Section 6038A(d) imposes a penalty on a “25-percent foreign-owned” domestic corporation or wholly foreign-owned domestic disregarded entity for the failure to furnish (on or before the date prescribed) certain information or the failure to maintain certain records.

    • Section 6038C(c) imposes a penalty on a foreign corporation engaged in a U.S. trade or business for the failure to furnish (on or before the date prescribed) certain information or the failure to maintain certain records. Section 6039F(c) imposes a penalty on a United States person for the failure to furnish (on or before the date prescribed) certain information with respect to the receipt of large gifts or bequests from foreign persons.

    • Section 6677 generally imposes a penalty on a United States person for the failure to file (on or before the date prescribed) a notice or return required by section 6048 with respect to transactions with, or ownership of, a foreign trust.

    • Section 6698(a)(1) generally imposes a penalty for the failure of any partnership to file (on or before the date prescribed) the return required under section 6031. Section 6698(a)(2) generally imposes a penalty for filing a return that fails to show the information required under section 6031. 1 Unless otherwise stated, all “section” references are to provisions of the Code.

    • Section 6699(a)(1) generally imposes a penalty for the failure of any S corporation (as defined in section 1361(a)(1)) to file (on or before the date prescribed) a return required under section 6037. Section 6699(a)(2) generally imposes a penalty for filing a return that fails to show the information required under section 6037.

    • Section 6721(a)(2)(A) generally imposes a penalty for the failure to file an information return (as defined in section 6724(d)(1)) on or before the required filing date. The foregoing penalties do not apply if the taxpayer can show that the failure to timely file the return or to furnish the required information or to provide the required notice, as applicable, is due to reasonable cause. See §§ 6651(a)(1), 6038(c)(4)(B), 6038A(d)(3), 6038C(c), 6039F(c)(2), 6677(d), 6698(a) flush language, 6699(a) flush language, and 6724(a).”

Section 3. Grant of Relief

The IRS has agreed to the waiver and/or abatement of penalties for certain Taxpayers who qualify. In addition, the IRS noted that the penalties will be automatically waived or abated so that no action is required by the Taxpayer.

• • • “The IRS will not impose the penalties listed in section 3.A.(1) through (4) of this notice with respect to the specified tax returns for taxable years 2019 and 2020 that are filed on or before September 30, 2022. The penalties listed in this section 3.A of this notice will be automatically abated, refunded, or credited, as appropriate without any need for taxpayers to request this relief.”

Let’s take a look at which returns are impacted by the penalty relief initiative:

• • (1)  Additions to tax under section 6651(a)(1) for failure to file the following income tax returns:

    • Form 1040, U.S. Individual Income Tax Return; Form 1040-C, U.S. Departing Alien Income Tax Return; Form 1040-NR, U.S. Nonresident Alien Income Tax Return; Form 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependent

    • Form 1040 (PR), Federal Self-Employment Contribution Statement for Residents of Puerto Rico; Form 1040-SR, U.S. Tax Return for Seniors; and Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico); • Form 1041, U.S. Income Tax Return for Estates and Trusts; Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts; and Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts;

    • Form 1120, U.S. Corporation Income Tax Return; Form 1120-C, U.S. Income Tax Return for Cooperative Associations; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-FSC, U.S. Income Tax Return of 6 a Foreign Sales Corporation; Form 1120-H, U.S. Income Tax Return for Homeowners Associations; Form 1120-L, U.S. Life Insurance Company Income Tax Return; Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons; Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations; Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts; Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies; and Form 1120- SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

    • Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; and

    • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)).

  • (2) Certain penalties under sections 6038, 6038A, 6038C, 6039F and 6677 for failure to timely file the following IIRs:

    • • Penalties systematically assessed when a Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and/or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is attached to a late-filed Form 1120 or Form 1065; and

      • Penalties assessed by the campus assessment program with respect to filings on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b)).

  • (3) Penalties under section 6698(a)(1) for failure to timely file and under section 6698(a)(2) for failure to show the required information on a Form 1065, U.S. Return of Partnership Income.

  • (4) Penalties under section 6699(a)(1) for failure to timely file and under section 6699(a)(2) for failure to show the required information on a Form 1120-S, U.S. Income Tax Return for an S corporation.

In addition, the IRS will not impose the penalties under section 6721(a)(2)(A) for failure to timely file any information return (as defined in section 6724(d)(1)) that meets the following criteria:

• • • 2019 returns that were filed on or before August 1, 2020, with an original due date of January 31, 2020; February 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically); or March 15, 2020; or • 2020 returns that were filed on or before August 1, 2021, with an original due date of January 31, 2021; February 28, 2021 (if filed on paper) or March 31, 2021 (if filed electronically); or March 15, 2021.

FBAR, FATCA & Offshore Disclosure

Unfortunately, FBAR and FATCA are not included in the notice. In addition, it is only limited to 2019 and 2020 — so Taxpayers out of compliance for FBAR and FATCA will want to consider Offshore Disclosure with a Board-Certified Tax Law Specialist team.

Golding & Golding: About Our International Tax Attorney Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS disclosure & compliance.

Contact our firm today for assistance.