Nearly 5 million taxpayers to get money back from the IRS. Here’s how much — and why

The IRS is giving nearly 5 million people and businesses $1 billion in penalty relief after the agency suspended overdue tax bill reminders.

The revenue service announced Tuesday it would give relief to about 4.7 million people, businesses and tax-exempt organizations that it didn’t send automated collection reminders to during the pandemic.

Starting in February 2022, the IRS suspended mailing those reminders because of the COVID-19 pandemic. The failure-to-pay penalties kept adding up for taxpayers who didn’t pay their bills after receiving the initial notice that they owed.

“As the IRS has been preparing to return to normal collection mailings, we have been concerned about taxpayers who haven’t heard from us in a while suddenly getting a larger tax bill,” IRS Commissioner Danny Werfel said in a news release. “The IRS should be looking out for taxpayers, and this penalty relief is a common-sense approach to help people in this situation.”

Who is eligible?

The IRS said 5 million tax returns, filed by 4.7 million people, businesses, trusts, estates and tax-exempt organizations, are eligible, for about $206 per return. The IRS is waiving the penalties for tax years 2020 and 2021.

Almost 70% of the individuals receiving relief make less than $100,000 annually.

It applies to those that filed certain Forms 1040, 1120, 1041 and 990-T income tax returns with an assessed tax of less than $100,000, and that were either in the IRS collection notice process or were issued an initial balance due notice between Feb. 5, 2022, and Dec. 7, 2023.

How does it work?

The relief is automatic so you don’t have to do anything to get it.

If you already paid your penalty, the IRS will issue a refund or credit the payment to another outstanding tax liability.

You’ll be able to see the refund or credit by checking your tax transcript, which is where you can view your tax records.

The IRS is issuing the refunds now for individuals and through January for business accounts. Trusts, estates and tax-exempt organizations will see adjustments in late February to early March.

While the penalties are being waived, the taxes are still due.

What’s next?

The suspension of reminders meant some taxpayers with tax debt haven’t received formal communication from the IRS in over a year. The IRS in January will send special reminder notices with an updated balance, ways to pay, and directions to contact the IRS or make arrangements to pay the bill.

Plus, the IRS will begin sending automated notices and letters again.

The failure-to-pay penalty — usually 5% of the tax owed for each month or part of a month that the return is late, up to 25% — resumes April 1, 2024. It applies when a taxpayer doesn’t pay by the due date or they don’t pay within 21 days of receiving a notice.

If you have penalty relief questions, you can contact the IRS after March 31.

What is The Sum?

The Sum is your friendly guide to personal finance and economic news.

We’re a team of McClatchy journalists cutting through the financial jargon so you know how these issues impact your life. We verify information from diverse sources and keep the facts front-and-center, making finance and economic news add up for you.

Ready to take the first step to getting your finances under control? You can sign up for our five-week budgeting newsletter at thesum.news.