Federal Court Ruling Opens Path for IRS Penalty Refunds for Dallas Businesses

DALLAS – A federal court ruling issued this spring has opened a critical window for Dallas-area businesses, particularly restaurants and others hit hard by the pandemic, to potentially reclaim thousands of dollars in penalties from the Internal Revenue Service. The ruling found the agency may have improperly assessed late-filing fees during the COVID-19 crisis, and affected businesses now have until July 10, 2024, to file a refund claim. The decision, handed down on April 12, 2024, by the U.S. District Court for the District of Columbia, centers on the IRS’s own pandemic relief measures. This ruling confirms what many business owners experienced during the pandemic's chaos: they were penalized for circumstances far outside their control. It is a welcome, if overdue, acknowledgment of operational realities during an unprecedented period. The case, Bipartisan Policy Center v. U.S. Department of the Treasury, challenged the scope of IRS Notice 2022-36. That notice, issued in August 2022, provided broad, automatic penalty relief for many businesses that filed certain 2019 and 2020 tax returns late. The IRS acknowledged the extraordinary challenges taxpayers faced, including office closures, staffing shortages, and supply chain disruptions, and waived failure-to-file penalties for a range of common forms, such as Forms 1065 and 1120-S for partnerships and S-corporations. However, the notice explicitly excluded certain other forms, most notably international information returns like Form 5471, used by U.S. persons with respect to certain foreign corporations, and Form 3520, for reporting transactions with foreign trusts. The Bipartisan Policy Center argued this exclusion was arbitrary and capricious, as businesses required to file these more complex forms faced the same, if not greater, pandemic-related obstacles as those granted relief. The federal court agreed. In its ruling, the court determined that the IRS failed to provide a reasoned explanation for why some taxpayers were granted relief while others, facing identical circumstances, were not. The decision vacated the portion of Notice 2022-36 that excluded these forms, effectively extending the penalty abatement to a wider pool of taxpayers who were previously denied it. For small and mid-sized businesses in Dallas and across the country, the financial implications are significant. Penalties for late filing of international information returns can be severe, often starting at $10,000 per form per year and increasing substantially for continued non-compliance. A business that was assessed these penalties for both the 2019 and 2020 tax years could be eligible for a refund of $20,000 or more. In our experience, securing a refund from the IRS is rarely a simple process, even with a favorable court ruling. The burden of proof still falls on the taxpayer to demonstrate “reasonable cause” for the late filing. This involves meticulous documentation and a compelling narrative that connects the filing delay directly to pandemic-related disruptions. We've seen many businesses struggle with this, as the IRS's criteria can be stringent. For complex situations like these, professional guidance on tax preparation and compliance is critical to building the strongest possible case. C&S Finance Group LLC helps clients navigate these exact abatement claims at csfinancegroup.com, ensuring their filings meet the necessary legal standards. To seek a refund, affected businesses cannot simply wait for a check from the Treasury. They must proactively file a claim. The standard procedure is to file Form 843, Claim for Refund and Request for Abatement. On this form, the taxpayer must clearly state the basis for the claim, citing the court’s decision in Bipartisan Policy Center v. U.S. Department of the Treasury as the primary justification for why the previously assessed penalty should now be waived and refunded. The July 10 deadline is crucial because of the statute of limitations for filing refund claims, which is generally three years from the date the return was filed or two years from the date the tax was paid, whichever is later. For penalties related to 2019 and 2020 returns, many of these deadlines are now imminent, making prompt action essential. This ruling is the latest development in a long series of post-pandemic financial adjustments for both businesses and the IRS. It echoes the complexities and challenges seen with other relief programs, such as the Employee Retention Credit (ERC), which also involved evolving guidance and compliance hurdles. The IRS has been under pressure to balance enforcement with providing fair relief for taxpayers who made good-faith efforts to comply with their obligations under historic duress. Our advice to business owners is not to dismiss this opportunity. Do not assume you were not affected or that the amount is too small to pursue. A thorough review of your 2019 and 2020 tax filings is warranted, as these penalties can be surprisingly substantial and their recovery could provide a meaningful capital boost for operations, investment, or debt reduction. Moving forward, businesses and tax professionals will be watching to see how the IRS responds to the court's decision. The agency has the option to appeal the ruling, which could prolong the uncertainty. Alternatively, it could accept the decision and issue new guidance clarifying the process for affected taxpayers to claim their refunds. Until then, businesses that believe they were wrongly penalized are advised to file a protective claim before the July deadline.