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Are You Facing Failure-to-File Penalties for Your Freelance Taxes? The IRS Just Announced Relief for 2019 and 2020 Penalties  

The IRS just announced that it will automatically provide relief from failure-to-file penalties including a broad range of tax and information returns for 2019 and 2020 tax years. This could be good news if you did not file your taxes for these years. If you have already paid the penalties, the IRS will also automatically issue you a credit.

Here are some answers to some common questions about the new IRS failure-to-file penalties:

Which tax and information returns does the penalty abatement apply to?           The penalty abatement applies not only to your federal individual and business taxes (Forms 1040, 1041, 1065, and 1120-S), but to information returns such as those for international information such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, attached only to Forms 1065 and 1120.

The abatement does not provide relief for taxpayers filing returns with certain international information such as form 5471, attached to returns other than Forms 1065 and 1120, such as Form 1040 or 1041.

While this penalty abatement may be great news for many freelancers, there is a caveat if you have not already filed for these years. You must file by September 30, 2022, to be eligible for the relief. After this date you will miss the relief opportunity.

When will penalty abatement checks be issued? The IRS plans to pay most of the refunds or apply credits by the end of September. However, any return still unfiled for the two tax years must be filed by Sept. 30, 2022, to be eligible for the relief.

The reason the IRS is providing this unusual relief? It circles back to Covid-19 and is an effort, according to the IRS, “to help struggling taxpayers affected by the COVID-19 pandemic” so that the Service can “focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.”

Keep in mind, that the IRS just received a significant budget boost in the Inflation Relief Act legislation, which means once they are caught up on returns for these past few years, they will be turning their attention toward other potential areas of tax delinquency.

The bottom line? If you didn’t file your requisite tax and information returns for 2019 and 2020, you have a small window of opportunity through September 30, 2022, to make good with the IRS without having to face the standard failure-to-file penalty of 5% of the unpaid taxes for each month or part of a month that a tax return is late. Take advantage of this opportunity so you can focus on timely filing and avoid penalties in the future.

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Jonathan Medows, CPA

Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.

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