IRS Sets May 17 Deadline for Businesses to Claim COVID-Era Late-Filing Penalty Refunds

WASHINGTON — Millions of U.S. taxpayers, including a significant number of small and mid-sized businesses, are facing a critical May 17, 2024, deadline to request refunds for penalties paid on late-filed 2020 tax returns. The deadline is the culmination of a broad COVID-19 pandemic relief measure the Internal Revenue Service announced in 2022, and failure to act in time will result in forfeiting the funds.

The relief stems from IRS Notice 2022-36, issued in August 2022, which provided automatic penalty abatement for taxpayers who failed to file certain 2020 and 2021 returns on time. The measure was intended to help those struggling during the pandemic. While the relief was automatic for taxpayers with outstanding penalties, a critical group was left to act on its own: those who had already paid the penalty. These individuals and businesses must proactively file a claim to get their money back.

This is a classic sleeper issue that can easily fall through the cracks for busy business owners. Many companies that were assessed these penalties paid them as a matter of course to remain in good standing and may have forgotten about them or incorrectly assumed any subsequent relief would also be automatic. For a small or mid-sized business, the potential refund is not trivial. Failure-to-file penalties can amount to thousands of dollars, money that could be immediately reinvested into operations, payroll, or inventory. In our experience, assuming the IRS will automatically handle refunds is a common and costly mistake for taxpayers. This situation highlights why diligent tax preparation and compliance services are so vital; they involve a proactive review of past filings to identify precisely these kinds of refund opportunities. Business owners who believe they may be eligible should review their 2020 and 2021 records immediately. For professional assistance navigating the claim process and ensuring all eligible refunds are secured before the deadline, contact C&S Finance Group LLC at csfinancegroup.com.

The penalty relief program was extensive, covering a wide range of common tax forms. These included individual income tax returns in the Form 1040 series, corporate returns in the Form 1120 series, as well as returns for partnerships (Form 1065) and estates and trusts (Form 1041). The specific penalty waived is the failure-to-file penalty, which can be substantial. It is calculated as 5% of the unpaid tax for each month or part of a month that a return is late, capped at a maximum of 25% of the outstanding tax liability.

When the program was announced, the IRS estimated that 4.7 million taxpayers—including individuals, businesses, trusts, and estates—were eligible for the relief. The total value of the waived penalties was projected to be $1.2 billion, with an average refund of approximately $255 per eligible taxpayer. However, for businesses with larger tax liabilities, the penalty amount, and therefore the potential refund, could be significantly higher, running into the thousands or even tens of thousands of dollars.

The primary reason this has become a looming issue is the lack of direct notification. The IRS automatically abated penalties for those who had been assessed but had not yet paid. But the agency did not send specific notices to the millions who had already paid, informing them that they were now eligible for a refund. The burden was placed entirely on the taxpayer or their financial advisor to be aware of Notice 2022-36 and to take the necessary steps to file a claim.

This administrative gap has caused confusion and inaction. Many business owners may have changed accountants since 2020, or the original notice may have been lost in the shuffle of other pandemic-related financial communications. Without a direct prompt from the IRS, many eligible businesses remain unaware that they are owed money.

To claim a refund, an eligible taxpayer must file a formal request. This is typically done by submitting an amended return, such as Form 1120-X for corporations or Form 1040-X for individuals and sole proprietors. The filing must explicitly request the abatement of the previously paid failure-to-file penalty under the terms of the relief notice. Taxpayers can also request the refund by responding to an IRS notice about the penalty or by contacting the agency directly. It is crucial to have documentation of the original penalty assessment and proof of payment.

The statute of limitations for claiming a tax refund is generally three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. For 2020 returns, which were due in mid-2021, that three-year window is closing on May 17, 2024. For businesses that operate on a fiscal year rather than a calendar year, the specific deadline may differ, making it essential to confirm the date based on their filing history.

As the May 17 deadline for 2020 returns passes, attention will shift to the corresponding deadline for 2021 returns, which will occur in 2025. Tax professionals and business advocates will be closely watching to see how many eligible taxpayers ultimately miss the deadline for this round of refunds and whether the IRS will face calls to simplify the process for future relief programs.