'This is a gift': The IRS is waiving $1 billion in penalties for Americans that owe back taxes — here's what you need to know

Who will get penalty relief?

The IRS issued a special reminder letter in January to taxpayers affected by the pandemic-related pause in payment reminders, alerting them of their liability, how to pay their bill and if they received any penalty relief. The agency also resumed normal collection notices.

The agency estimates that 4.7 million tax returns — filed by individuals, businesses, trusts, estates and tax-exempt organizations — were eligible for the relief, which will represent about $1 billion in savings to taxpayers, or about $206 per return. Nearly 70% of the individual taxpayers receiving penalty relief have income under $100,000 per year.

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Penalty relief will be applied to eligible taxpayers automatically. If you’ve already repaid your full balance and the failure-to-pay penalties related to your 2020 and 2021 debts, the IRS will issue a refund or credit the payment toward another outstanding tax liability.

“This is a gift,” Jim Buttonow, a certified public accountant in Summerfield, North Carolina, told the Wall Street Journal. Buttonow, who worked in IRS compliance for nearly 20 years, described the move as unprecedented, noting that the lack of a reminder wouldn’t normally be considered a reasonable cause to get penalty relief.

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Tackling outstanding tax debts

Uncle Sam may be lending a helping hand this time, but it’s important to never leave him hanging, either.

“The IRS wants to help taxpayers and provide them easy options to deal with unpaid tax bills and avoid additional interest and penalties,” Werfel said. “People receiving these notices should remember that there are frequently overlooked options that can help them set up an automatic payment plan or catch up with their tax filings.”

There are many ways to resolve your tax bill without getting slammed with fees and penalties. For instance, you can apply for a payment plan, also known as an installment or online payment agreement, to pay off your balance over time. You can also request an Offer in Compromise — formerly called the Fresh Start program — which allows eligible taxpayers to settle their debt for less than what they owe. Finally, you may request to temporarily delay collection until your financial condition improves.

Remember, it’s important to both file and pay your taxes on time if you can. Failure to do so can result in various consequences depending on the type of penalty, which the IRS details on its website.

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