Form 3520 Penalty Relief

We have recently posted about the IRS’s broad relief for late filing penalties for 2019 and 2020 tax returns. During the height of the pandemic, taxpayers experienced many obstacles to the timely filing of their 2019 and 2020 tax returns. Because of the scale of the problem, the National Taxpayer Advocate, Members of Congress, and tax practitioner groups called upon the IRS to implement a comprehensive remedy including penalty abatements. To its credit, the IRS announced a broad late filing administrative penalty relief program on August 25, 2022, and has been automatically abating late filing penalties without the need for taxpayers to request penalty relief.

Late filing penalty relief will continue to be applied to returns received through September 30, 2022, and many of the refunds will be completed by the end of September. While the IRS is initiating notices and refunds for taxpayers who previously paid the penalty, its correspondence does not explain the penalty relief, can be confusing for taxpayers, and can generate questions. The IRS will need to abate certain penalties manually, such as those associated with the late filing of Forms 3520 and 3520-A, which will take somewhat longer to process. If the IRS has assessed penalties, they will be removed, and if a request for abatement was denied, it will now be automatically granted. If the abatement or removal of penalties generates a refund, it will first be applied to any outstanding liabilities, and the balance will be paid by check and mailed to taxpayers’ current address in the IRS’s system.

Taxpayers seeking information about whether this relief has been applied to their tax situations will likely find that the most effective way to get this information is to use their online account with IRS.gov to view their transcripts. If the taxpayer does not have an online account, I highly recommend he or she create one. With an online account, taxpayers can check their account information including balance, payments, tax records, penalties, waivers, and more. It’s a simple and secure way to get information fast without having to pick up the phone and is a useful tool to obtain tax information throughout the year.

Tax Tip: To verify whether a failure-to-file penalty has been removed (abated), look for a 167 posting on the lefthand side of a taxpayer’s transcript of account. If a refund was issued, you will see an 846 posting together with the date and amount of the refund.

Taxpayers assessed a late filing penalty will see a transaction code (TC) 166 on their account transcript that reflects the dollar amount of the penalty charged. An example is as follows:

166 Penalty for filing tax return after the due date 10-18-2020 $500.00

When a late filing penalty is later removed, including as part of the IRS’s broad penalty relief initiative, the account transcript will contain a TC 167 with a corresponding negative dollar amount reversing the late filing penalty charged. This transaction will appear similar to the following:

167 Reduced or removed penalty for filing tax return after the due date 09-15-2022 -$500.00

We recommend taxpayers and representatives seeking an explanation for an account adjustment or confirmation that penalty relief was granted bypass long wait times on the IRS phone lines by accessing tax account transcripts online and reviewing the account for these transactions.

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