First time penalty abatement

[Greenbriar]

I've searched past threads and can't find what I'm looking for. I recall the IRS may waive late filing or late payment penalty for first time offender. Looked on IRS.gov and could not find it. Can anyone shed light on this for me? Thanks.

[ATSMAN]

Requesting Penalty Relief

Methods for Requesting Penalty Relief

Taxpayers can request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three ways, depending on their situation:

Before the IRS assesses a penalty, the taxpayer can file a penalty nonassertion request with a paper return to request that the IRS not automatically assess a penalty.
After the IRS has assessed a penalty, the taxpayer can request penalty abatement, typically by writing a penalty abatement letter or by calling the IRS. Tax professionals can also request abatement using IRS e-services.
After the taxpayer has paid the penalty, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement.6 The taxpayer must file the claim within three years of the return due date or filing date, or within two years of the date the penalty was paid.


Reasons to Request Abatement

Generally, relief from penalties falls into four separate categories: reasonable cause, statutory exceptions, administrative waivers, and correction of IRS error. Under the category of administrative waivers, the IRS may formally interpret or clarify a provision to provide administrative relief from a penalty it would otherwise assess. The IRS may address an administrative waiver in either a policy statement, news release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions. The most widely available administrative waiver is FTA.
First-Time Abatement Waiver

In 2001, the IRS established FTA to help administer the abatement of penalties consistently and fairly, reward past compliance, and promote future compliance. This administrative penalty waiver allows a first-time noncompliant taxpayer to request abatement of certain penalties for a single tax period—one tax year for individual and business income taxes and one quarter for payroll taxes.

According to TIGTA, for tax year 2010, the average individual failure-to-file abatement qualifying under FTA was $240, and the average failure-to-pay abatement was $84. However, more than 90% of individuals who qualified for an FTA did not receive the waiver for 2010.7 This is likely because taxpayers did not know they could request it. The IRS does not publicize FTA as a relief option on its penalty-related notices or on its website.8

The remainder of this article discusses how to determine whether a client qualifies for FTA and how to request it from the IRS.
Penalties Eligible for an FTA

FTA applies only to certain penalties and certain returns filed. First, determine whether FTA applies to the client’s situation:

Individual taxpayers can request an FTA for failure-to-file and failure-to-pay penalties. Estate and gift tax returns do not qualify for FTA waivers.9
Business and payroll taxpayers can request an FTA for failure-to-file, failure-to-pay, and/or failure-to-deposit penalties. The IRS is not explicit in its Internal Revenue Manual (IRM), but in practice, the IRS has granted FTAs for S corporation and partnership late-filing penalties.10
For individual and business taxpayers, the estimated tax and accuracy-related penalties cannot be waived under FTA.


Clean Compliance Criteria

If FTA applies to the client’s situation, the practitioner must determine whether the client qualifies to receive it, which entails most of the complexity involved in requesting an FTA. To qualify, the client must demonstrate filing and payment compliance and a three-year clean penalty history.

To meet the rule for filing compliance, the client must have filed, or filed a valid extension for, all currently required returns and must not have an outstanding request from the IRS for an unfiled return.11 To meet the payment compliance rule, the client must also have paid, or arranged to pay, any tax due. The client can have an open installment agreement, as long as installment payments are current. According to the IRM, the IRS should give a taxpayer not currently in compliance with these payment requirements an opportunity to comply and thereby qualify for an FTA before the IRS considers whether the penalty can be abated for reasonable cause.12

To meet the rule for clean penalty history, the client cannot have had penalties of a “significant”13 amount assessed in the prior three years on the same tax return for which the client is requesting abatement. IRS procedures do not publicly define a “significant” amount. In practice, the IRS has considered any penalty amount as significant in its application of the FTA qualification.14 If the IRS rejects the client’s request because of a small penalty assessment, remind the IRS of the “significant” qualification in the IRM.

The client will not be disqualified from receiving an FTA based on lack of a clean penalty history if the client:

Had a penalty assessed more than three tax years prior to the tax return in question.
Had an estimated tax penalty assessed in the past three years.15
Received reasonable-cause relief from penalties at any point in the past.
Received an FTA more than three tax years prior to the tax return in question.
Has penalties on subsequent tax years.16


Requesting an FTA

By phone or e-services: A practitioner who determines that the client qualifies for an FTA can request it in several ways. Start with simple methods. If the client’s case does not involve a compliance function, call the IRS Practitioner Priority Service (PPS) line17 or use the IRS e-services Electronic Account Resolution function.18 The IRS representatives in Accounts Management have authority to grant an FTA.

When an IRS compliance unit assesses the penalty, requesting an FTA from a PPS representative or by e-services will not work. For example, for a taxpayer under audit or underreporter inquiry or with a case in IRS Collection or Appeals functions, the appropriate compliance unit will address penalties based on the taxpayer’s facts and circumstances. If a compliance unit assesses a penalty, penalty relief must typically be requested directly from that unit.19

Keep in mind that there is an unpublished ceiling on the amount in penalties that the IRS will abate under FTA by phone or e-services (referred to as oral statement authority).20 The IRS redacts the oral statement authority threshold amount in its IRM for tax administration purposes.21

For reasonable-cause determinations, in lieu of accepting an oral request, the IRS can require taxpayers to send in documentation to support their claim. The IRS representative can accept “credible information” orally or in writing. The IRS’s automated Reasonable Cause Assistant (see below) prompts the representative to ask for documentation.22 If the client’s penalties exceed the threshold, the waiver still applies, but IRS procedures require that the FTA request be in writing.23 In practice, when requesting abatement of penalty amounts in thousands of dollars, be prepared to request an FTA in writing.24

In writing: When requesting an FTA in writing, provide any other relevant penalty relief arguments, including reasonable-cause arguments, to increase the client’s chances of having the penalty removed.

If the client has clear reasonable cause for the penalty, present the reasonable-cause argument first and request that the IRS abate the penalty on those grounds. This is a best practice because the client may need to use the FTA waiver for a subsequent year, and abatement due to reasonable cause will not disqualify the client from receiving an FTA.

If the client technically does not qualify for an FTA because of a penalty in the past three years but is otherwise compliant, present this history in conjunction with other arguments to the IRS for penalty abatement. Remind the IRS that although FTA does not apply, the client has a clean compliance history except for the one incident of noncompliance.

[appelman]

That's good stuff.

What's the source? I think I read recently that the FTA has been formalized, though I can't immediately pay hands on the cite. Even the IRS reps have taken to calling it the "Get Out of Jail Free Card."

[Greenbriar]

Thank you Atsman

Great info. Plenty to go on. thanks very much.

[ATSMAN]

It was published in Journal of Accountancy I think. I just kept the info i needed.

[DaveinTexas]

Source

What's the source? I think I read recently that the FTA has been formalized, though I can't immediately pay hands on the cite. Even the IRS reps have taken to calling it the "Get Out of Jail Free Card."

Try this source:

http://www.aicpa.org/Publications/TaxAdviser/2013/July/Pages/Buttonow_July2013.html.aspx

The FTA is also littered throughout the IRM.