Abatement of Failure to pay penalties for installment agreement

[Gretel]

TP gets only SS disability income and never needs to file. Last year because he couldn't come up with 10k for his life insurance (please do not question this part), life insurance was cancelled, leaving him with a tax bill of over $10,000, which he cannot pay all at once. He wants to enter into an IA and will be able to pay within 7 years. Does the first time penalty waiver apply to this situation, and if, for all of the penalties? I am sure he needs to pay first before anything can be done.

[Corduroy Frog]

Don't Understand

Respecting your post, I won't question how the insurance cancellation resulted in tax, but I don't understand the rest of this either.

Did he actually make an installment agreement and default? This is what your post (and title suggests), but parts of the verbage imply the IA has not yet been set up.

I gather that your client usually does not have to file, but ended up with a tax liability of $10K for a single year. If this has just happened for 2014, there will be no failure to pay penalty for 2014 until April 16th. If an installment agreement is accepted by the IRS there should be no failure to pay penalty. Of course, there will be the set-up fee for the installment agreement, but acceptance by the IRS should exonerate him from FTP penalty.

If the $10K liability stems from a prior year, that is a different story. The FTP penalty will be 0.5% for each month not paid since April 15th of whatever year. The penalty can be waived at the option of the IRS for good cause if satisfactory arrangements are paid for payment, so I would at least try to convince them to waive, and charge the client for your time and trouble.

[Gretel]

The installment agreement will be set up for 2014 with payments over the next 7 years. Each month there will be additional penalties and interest. Just wondering if the penalties can be abated in the end. This taxpayer has too much income to qualify for CNC but enough to pay his balance. Luckily interest rates are low.

[taxea]

I don't understand the 10K in tax either. Doesn't he get a deduction from the distribution for his contributions? I would look at the documents for this policy before completing the return. Clients often don't think about money they have already contributed. More info needed to accurately answer your question.

[Corduroy Frog]

No penalties

Each month there will be additional penalties and interest. Just wondering if the penalties can be abated in the end.

I don't think there should be Failure to Pay penalties if the installment agreement was accepted and payments were properly observed. There may be penalties of some other kind, but ftp should not be assessed. There will always be interest.