I recently blogged about the IRS’ comprehensive relief for late-filing penalties on tax returns for 2019 and 2020. At the height of the pandemic, taxpayers faced many obstacles to filing their 2019 and 2020 tax returns on time. Because of the scale of the problem, the National Taxpayer Advocate, members of Congress and tax practitioner groups called on the IRS to implement comprehensive corrective measures, including penalty reductions. To its credit, on August 25, 2022, the IRS announced a comprehensive program to ease late filing of administrative penalties and has automatically reduced late filing penalties without requiring taxpayers to seek penalty relief.
Late submission penalty relief will continue to apply to returns received by September 30, 2022, and many of the refunds will be completed by the end of September. While the IRS initiates notices and refunds for taxpayers who previously paid the penalty, its correspondence does not explain the penalty relief and can be confusing and raise questions for taxpayers. The IRS must manually mitigate certain penalties, e.g. B. Those related to the late filing of Forms 3520 and 3520-A, which will take a little longer to process. If the IRS has imposed penalties, they will be removed, and if a request for a reduction has been denied, it will now automatically be granted. If the reduction or waiver of penalties results in a refund, it will first be applied to any outstanding debt and the balance will be paid by check and mailed to the taxpayer’s current address in the IRS system.
Taxpayers seeking information about whether this relief has been applied to their tax situation will likely find that the most effective way to obtain this information is to use their online account with IRS.gov to view their transcripts. If the taxpayer doesn’t have an online account, I strongly encourage them to create one. With an online account, taxpayers can review their account information, including balances, payments, tax records, penalties, waivers, and more. It’s an easy, secure way to get information quickly without having to pick up the phone, and a useful tool for getting tax information all year round.
Taxpayers who have been assessed a late filing penalty will see a transaction code (TC) 166 on their bank statement, reflecting the dollar amount of the penalty imposed. An example is as follows:
166 Penalty for filing tax returns after the 10/18/2020 due date $500.00
If a late filing penalty is later removed, including as part of the IRS’ broader penalty relief initiative, the account transcript will include a TC 167 with a corresponding negative dollar amount that reverses the late filing penalty imposed. This transaction looks similar to the following:
167 Reduced or eliminated penalty for filing a tax return after the 09/15/2022 due date – $500.00
We encourage taxpayers and representatives seeking an explanation of an account adjustment or confirmation that a penalty relief has been granted to avoid long waits on the IRS phone lines by accessing tax account transcripts online and checking the account for these transactions.
Transcripts are a valuable source of information
A few months ago I blogged about the types of IRS transcripts available, how these transcripts can be used and how to request them. While helpful, I recognize that IRS transcripts can be confusing at times and do not always present the full picture as it pertains to a taxpayer’s account activity. IRS transcripts are created from the IRS’s Integrated Data Retrieval System (IDRS), an outdated and complex system that uses codes to explain the activities that take place on a taxpayer’s tax account. To avoid confusion, not all of the codes presented on IDRS are included in the publicly available transcripts, and some leave something to be desired in terms of explanation. I continue to advocate for improvements to make these account logs more understandable, but in the meantime let’s clear up some additional transcription issues that often cause confusion.
Why are there so many 290 “additional tax” transactions in my account – have I been audited?
Code 290 is a reusable TC. If a tax amount is displayed to the right of TC 290, additional tax is being charged and this can be for a number of reasons. To determine why, you need to look for other codes that can provide an explanation for the assessment (TC 977 – Tax Return Amendment or TC 922 – Review of Undeclared Earnings, to name the most common). Otherwise TC 290 is probably being used for some other reason. Although the account may not have been verified, it is likely that something happened on the account that caused IDRS to require verification. As discussed below, a TC 290 with zeros is often used to signal IDRS that this verification has taken place.
In the example below, a tax relief credit of $1,200 (TC 766) was posted to the tax account on April 27, 2020, well before the federal income tax return for tax year 2020 was due (see Notice 2021-21, where the IRS set the due date for returns 2020 to May 17, 2021). Under normal circumstances, a credit simply remains in a tax account until a tax return is filed. The IRS computer system does not automatically generate a refund for an account that does not have a posted tax return (TC 150). In this case, a TC 290 with zeros was required to signal that the overpayment could be refunded without filing a tax return. There are often many TCs on an account, so it’s helpful to review all transactions with the same cycle dates or transaction dates to fully understand some of the more complex account activity. For example, on April 27, 2020, TC 766 tax relief credit was posted, TC 290 was posted with zeros to verify credit eligibility and release the refund, and TC 971 generated message 1444, a message created to Advising taxpayers of the stimulus bonus they would receive.
|code||Explanation of the transaction||cycle||date||Crowd|
|150||tax return submitted||20210705||03/08/2021||$5,000.00|
|806||W-2 or 1099 withholding||04/15/2021||-$2,000.00|
|766||Tax Relief Credit||04/27/2020||-$1,200.00|
|290||Additional tax applied||20201505||04/27/2020||$0.00|
|971||Notice issued – Notice 1444||04/27/2020||$0.00|
The TC 290 also releases certain other account lockouts that may occur when the IDRS system detects activity that appears to conflict with normal processing. For example, if a tax return has been posted to an account and a second return is received, a hold is automatically placed until the reason for the second return can be investigated. When this happens, you’ll often see a TC 976 on the account, referred to as a “duplicate” return. The system will not release overpayments on the account until a TC 290 tax assessment has been made, a TC 291 tax reduction has been made, or a TC 290 has been entered with zeros to clear the hold when no tax adjustment is required. Also, when a payment is received into a fully paid account, IDRS will often initiate a hold to hold the overpayment until the reason for the payment can be investigated. In this case, you may see a TC 570 described as “additional account action pending”. If no tax adjustment is justified, a TC 290 with zeros can be entered to unfreeze the TC 570 and allow for a refund of any overpayment, if any. A TC 290 with zeros is often entered when a request for reduced sentence is being considered, and sometimes the TC 290 with zeros is entered simply to systemically generate a document locator number needed for refiling a tax return or tax account documents that returned to IRS files.
Note: To comply with IRC § 6103, which generally requires the IRS to keep tax returns and return information confidential, the transcripts contained in this blog are fictitious.
Stay tuned for part 2…