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IRS Penalty Relief Spotlight:
First-Time Abatement
IRS Penalty Relief Spotlight: First-Time Abatement
If this is your first IRS notice charging penalties for late filing or late payment, you likely have no idea what options you have. Many taxpayers swallow their frustration and simply pay the hefty penalties. But, you do have options.
First Time Abatement (FTA) is an IRS relief waiver that was introduced in 2001 that allows a first-time noncompliant taxpayer to request abatement, or removal, of certain penalties for a single tax period. IRS policy is clear and deliberate on their reason for existence: to deter taxpayer noncompliance, not to generate revenue. This relief was introduced to reward taxpayers who are typically compliant with a time amnesty on their penalty. This can save taxpayers up to thousands of dollars in some cases. However, this relief remains largely unused by taxpayers because many are unaware of its existence. Another hurdle of the FTA relief is that the IRS representatives themselves incorrectly disallow FTA when using their automated decision tool (known as the RCA). Luckily this can be overruled by an IRS employee if the taxpayer qualifies.
What Penalties Are Eligible for Relief?
To be clear: most penalties are not eligible for FTA. However, those that do can offer taxpayers thousands of dollars in relief. Here are the 3 primary penalties that are eligible:
- Failure-to-File: if you did not file your tax return on time or failed to file an extension, you could be subject to significant penalties. These penalties can be the greater of $435 or 25% of your unpaid taxes.
- Failure-to-Pay: whether due to hardship or oversight, you may have missed the tax payment deadline. Iniitially, this penalty nets against your failure-to-file penalty. Unlike that penalty, this penalty does not have a maximum and will continue accruing .5% of your taxes.
- Failure to Deposit Payroll Taxes: this specific penalty applies only to businesses processing payroll. If you may be eligibile for relief based on this penalty, we recommend that you contact your payroll provider.
How do I qualify?
To qualify for first-time abatement, you must demonstrate 3 attributes:
- Filing Compliance: the taxpayer must have filed, or filed a valid extension for, all currently required returns and not have an outstanding request from the IRS for an unfiled return.
- Payment Compliance: the taxpayer must also have paid, or arranged to pay, any tax due. You can have an open installment agreement if payments are current.
- Clean Penalty History: the taxpayer cannot have had penalties of a “significant” amount assessed in the prior three years on the same tax return for which you are requesting abatement. If the IRS rejects the request because of a small penalty assessment, your accountant will remind the IRS of the “significant” qualification in the IRM.
You will not be disqualified based on your penalty history if you:
- had a penalty assessed more than three tax years prior to the tax return in question;
- have penalties on subsequent tax years; or
- received reasonable-cause relief from penalties in the past.
How do I apply?
If you believe that you are eligible for first-time abatement relief, take action. Your first step is to call the IRS at the phone number on your notice. If one isn't listed, you can call the IRS at 1-800-829-1040. Explain your situation and that you would like to request a first-time abatement. If they refuse to provide this relief, make sure to ask the reasons for disqualifying you from relief. Write this down and keep your notes with your records.
If you are unable to reach the IRS via phone, consider writing a letter. As the IRS mail processing is experiencing significant delays, consider mailing your letter with tracking and adding the tracking report to your records as well. You can find an example FTA letter from the AICPA here.
If you still need further assistance resolving your notice, contact us! Our team will be happy to walk you through the ways that we can help as well as the limitations of our services.
IRS Circular 230 Disclosure: Pursuant to Treasury Regulations, any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.
This article is not intended to assist users in estimating tax penalties and only intended for reference purposes. IRS penalty calculations involve significant additional calculation and these figures cannot project your penalty liability.
Additional Resources:
If this is your first IRS notice charging penalties for late filing or late payment, you likely have no idea what options you have. Many taxpayers swallow their frustration and simply pay the hefty penalties. But, you do have options.
