IRS Offering $1B in ‘Gifts’ for Americans Who Owe Taxes
The Internal Revenue Service (IRS) has made a significant announcement that will impact millions of Americans who owe back taxes. On December 19th 2023, the IRS revealed its plan to waive $1 billion in penalties associated with overdue tax bills from 2020 and 2021.
This decision comes as a response to the unique challenges posed by the COVID-19 pandemic during which the IRS temporarily stopped the mailing of automated reminders for overdue taxes.
Understanding the Context of IRS' Decision
MoneyWise reports that during the period when reminder notices were suspended, interest and failure-to-pay penalties continued to accrue for taxpayers who had not settled their tax bills in full.
![The image captures a contemporary building with a curved facade under a clear sky. In the foreground, there's a tall statue of a striped column topped with a sculpted hand raised upwards, and to the right, a pyramid-shaped monument with the inscription "We the People"](https://images.savvydime.com/2024/01/0d89e3ba-screenshot-2024-01-23-213631.jpg)
Source: Wikimedia Commons
The IRS is now set to resume normal collection notices in 2024, and as a precursor to this, it is providing relief from penalties to almost 5 million taxpayers. Many of these taxpayers were likely unaware of the exact amount they owed due to the pause in reminders.
IRS Commissioner Comments on the Relief Measure
The Wall Street Journal reveals that IRS Commissioner Danny Werfel commented on the decision, stating, “We have been concerned about taxpayers who haven’t heard from us in a while suddenly getting a larger tax bill.”
![Danny Werfel wearing a dark suit and tie stands speaking at a podium labeled "TREASURY". Behind him, there are multiple American flags and a green flag with insignia](https://images.savvydime.com/2024/01/b839822d-screenshot-2024-01-23-213649.jpg)
Source: Getty Images
He emphasized that the IRS aims to support taxpayers, considering this penalty relief as a practical approach to assist those affected by the pause in reminder notices.
Criteria for Receiving Penalty Relief
In January 2024, the IRS plans to send out special reminder letters to those taxpayers affected by the pandemic-related pause in payment reminders, as per information from the Wall Street Journal.
![A close-up image of scattered United States hundred dollar bills covering the entire frame, showcasing the currency's design details including the portrait of Benjamin Franklin](https://images.savvydime.com/2024/01/c8e0ac51-screenshot-2024-01-23-213617.jpg)
Source: engin akyurt/Unsplash
These letters will inform them of their liability, ways to pay their bill, and the details of any penalty relief received.
Who Is Eligible for the Penalty Relief?
The IRS estimates that approximately 4.7 million tax returns are eligible for this relief, encompassing individuals, businesses, trusts, estates, and tax-exempt organizations.
![An image featuring a black scientific Casio calculator on top of scattered United States dollar bills, next to a white notepad with lined pages and a silver pen](https://images.savvydime.com/2024/01/b0af15fc-screenshot-2024-01-23-213721.jpg)
Source: Karolina Grabowska/Pexels
This relief translates to about $1 billion in savings for taxpayers, averaging about $206 per return. Notably, nearly 70% of the individual taxpayers receiving this relief have incomes below $100,000 per year.
Automatic Application of Penalty Relief
CNBC reports that the IRS has stated that penalty relief will be automatically applied to eligible taxpayers.
![A woman with black hair wearing glasses and a cream-colored sweater is holding a piece of paper, appearing to be reading it intently](https://images.savvydime.com/2024/01/8d030913-screenshot-2024-01-23-213736.jpg)
Source: Mikhail Nilov/Pexels
For those who have already paid their full balance and the associated failure-to-pay penalties for 2020 and 2021 debts, the IRS will issue refunds or apply credits towards other outstanding tax liabilities.
Professional Perspective on the IRS Move
Jim Buttonow, a certified public accountant in Summerfield, N.C., shared his views with the Wall Street Journal, describing the IRS’ decision as unprecedented.
![A desk with a tax form prominently displayed in the center. A magnifying glass and a silver pen lie on top of a closed notebook beside the form. Part of a laptop is visible on the right edge](https://images.savvydime.com/2024/01/6c0dfb2c-screenshot-2024-01-23-213755.jpg)
Source: Nataliya Vaitkevich/Pexels
“This is a gift,” he said, noting that the absence of a reminder wouldn’t typically be considered a reasonable cause for granting penalty relief. Buttonow, who has nearly 20 years of experience in IRS compliance, stressed the unique nature of this move.
Importance of Addressing Outstanding Tax Debts
While acknowledging the IRS’ supportive gesture, taxpayers are reminded of the importance of addressing their tax debts.
![A close-up of a handwritten reminder on a sticky note that reads "Pay debt" in red ink, placed on a red and black plaid surface. Alongside the note is a red pen and the edge of a pair of glasses, with part of a blue smartphone visible in the frame](https://images.savvydime.com/2024/01/41d002ec-screenshot-2024-01-23-213811.jpg)
Source: Towfiqu barbhuiya/Unsplash
MoneyWise notes that IRS Commissioner Werfel advised, “The IRS wants to help taxpayers and provide them easy options to deal with unpaid tax bills and avoid additional interest and penalties.”
Resumption of Penalty Charges in 2024
The IRS has clarified that the waiver of late-payment penalties is temporary and specific to unpaid balances from the tax years 2020 and 2021. The penalties for these years will resume on April 1, 2024.
![Danny Werfel stands at a podium bearing the seal of the Internal Revenue Service (IRS) within the Department of the Treasury. Behind him to the left is an American flag alongside a green flag with insignia, set against a backdrop with the IRS emblem](https://images.savvydime.com/2024/01/d5c0be2e-screenshot-2024-01-23-213828.jpg)
Source: Getty Images
Darren Guillot, national director at Alliantgroup and former IRS deputy commissioner said “December to April is clearly a time taxpayers want to put this away” and noted the importance of making a plan to avoid enforcement, as reported by CNBC.
Details on the Failure-to-Pay Penalty
CNBC explains that the waiver applies to the failure-to-pay penalty, which is calculated at 0.5% of unpaid taxes per month or part of a month, capped at a maximum of 25%. It is important to note that while penalty relief is being offered, eligible taxpayers may still be subject to the failure-to-file penalty and interest.
![A man and a woman are seated at a wooden table, working together on financial documents. The man, wearing glasses and a plaid shirt, is pointing at a paper, while the woman, in a light blazer, holds a pen and focuses on the document. A calculator, a smartphone, an open notebook, and a laptop are also on the table](https://images.savvydime.com/2024/01/5afc2e66-screenshot-2024-01-23-213844.jpg)
Source: Mikhail Nilov/Pexels
The late filing penalty stands at 5% of unpaid taxes per month or part of a month, with a maximum fee of 25%.
Understanding the Interest Accrual on Unpaid Taxes
For taxpayers with outstanding debts, it’s important to understand how interest accrues on unpaid taxes. The IRS sets interest rates quarterly, and currently, the rate is at 8% per year, compounded daily.
![A person in a light blue shirt is counting a stack of United States twenty-dollar bills. More bills are laid out on the white table in front of them. In the background, there are office supplies, including a calculator, sticky notes, a notebook, and a mug](https://images.savvydime.com/2024/01/d033b5cd-screenshot-2024-01-23-213859.jpg)
Source: Karolina Grabowska/Pexels
This interest continues to accumulate on unpaid tax amounts, regardless of any penalty waivers or payment plans. The Wall Street Journal shares that tax experts like E. Martin Davidoff emphasize that managing these interest charges is crucial, as they can significantly increase the total amount owed over time.
Options for Taxpayers Unable to Pay in Full
Taxpayers unable to pay their full tax debt have options. Davidoff, a certified public accountant and tax lawyer, explains to The Wall Street Journal that those facing hardships can set up a partial payment plan or secure an offer in compromise with the IRS, allowing settlement for less than the owed amount.
![A focused woman wearing glasses and a light blue shirt is intently examining a long, printed receipt in her hands. She holds a pencil in her other hand, ready to make notes on the spiral notebook in front of her](https://images.savvydime.com/2024/01/3d35e80f-screenshot-2024-01-23-213916.jpg)
Source: Drazen Zigic/Freepik
It’s important to note that this process involves substantial financial disclosures and can take months.