IRS Collection Notices and Penalty Relief

The IRS has resumed sending out some automated collection notices to taxpayers with outstanding balances due. For nearly two years more than a dozen automated collection letters and notices associated with the filing of a tax return or payment of tax have been on pause. The decision was made by the IRS to suspend sending these notices until it was able to eliminate the sizable backlog of processing paper tax returns and correspondence that built up during the pandemic. 

Recently the IRS, after catching up from the backlog, has started sending out the following collection notices in limited circumstances: 

• Notice CP501, 1st Notice – Balance Due 
• Notice CP503, 2nd Notice – Balance Due 
• Notice CP504, Final Notice – Balance Due 

While the collection notices stopped, failure-to-pay penalties didn’t and continued to accrue for taxpayers who had overdue taxes after receiving the initial balance due notice.

Because of this unusual situation, the IRS has put a plan in place to help taxpayers with unpaid tax bills, including some people who haven’t received a notice from the IRS in more than a year.

$1 Billion in Penalty Relief for Taxpayers and Businesses

The IRS also said it will be providing about $1 billion in penalty relief to approximately 4.7 million individuals, businesses, and tax-exempt organizations that weren’t sent collection reminders about their overdue taxes during the pandemic.

Starting next month, the IRS will issue a special reminder letter that will alert taxpayers of their liability, easy ways to pay, and the amount of penalty relief, if applied. The Service is urging taxpayers who are unable to pay their full balance to visit IRS.gov/payments to arrange to resolve their bill.

Who is eligible for the penalty relief?

The penalty relief only applies to eligible taxpayers with assessed tax under $100,000. Eligible taxpayers include individuals, businesses, trusts, estates, and tax-exempt organizations that filed certain Forms 1040, 1120, 1041, and 990-T income tax returns for tax years 2020 or 2021, with an assessed tax of less than $100,000, and 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 said the $100,000 limit applies separately to each return and each entity. The failure-to-pay penalty will resume on April 1, 2024, for taxpayers eligible for relief.

This penalty relief is automatic, the IRS noted, and eligible taxpayers don’t need to take any action to receive it. Eligible taxpayers who already paid their full balance will also benefit Those who paid failure-to-pay penalties for tax years 2020 and 2021 will receive a refund or the IRS will credit the payment toward another outstanding tax liability.

If the automatic relief results in a refund or credit, individual and business taxpayers will be able to see it by viewing their tax transcript. The IRS will send the first round of refunds through January 2024. If a taxpayer doesn’t receive a refund, a special reminder notice may be sent with their updated balance beginning in early 2024. Taxpayers with questions on penalty relief can contact the IRS after March 31, 2024.

If you have questions about this topic or other accounting, tax or advisory services, please call 215.675.8364 or email us to speak with a CPA today.

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