IRS Penalty Abatement
IRS First Time Penalty AbatementThey say “Nothing is sure in life but death and taxes.” But, as it turns out, not every tax debt or penalty is set in stone. It is possible to be relieved of interest and penalties in the form of an IRS penalty abatement. If you don’t believe that you should be required to pay certain federal penalties or interest, you can apply for IRS First Time Penalty Abatement, also known as FTA. If you qualify and are approved, the IRS will remove all of your penalties.
Qualifying for a Penalty AbatementThe IRS isn’t going to waive penalties and significant tax debt for just anyone; there are strict guidelines in order to qualify. To get approval, you will need to prove to the IRS that there is reasonable cause for filing or paying late. Reasons for qualification include:
- Emergencies, like natural disasters, medical expenses, and other unforeseen events
- If the IRS made a mistake on your return or delayed your return, you may qualify
- If the IRS gave you bad advice that leds to penalties and if you have this advice in writing
IRS First-Time Penalty AbatementIf it’s your first offense with the IRS, they may grant you an FTA (first-time abatement) if your penalty is on the list of abatable infractions. IRS penalty abatements often go unused by taxpayers simply because they are unaware of their existence. According to IRS policy on first-time penalty abatement, if you’ve always paid your taxes on time and are in otherwise good standing with the IRS, then you may qualify for the FTA program. But here’s where it gets tricky: you may also qualify if you have had a penalty in your past. Even if you’ve answered yes to the following questions, you may still qualify.
- You’ve had a penalty assessed more than 3 years prior to the tax year with the present penalty
- You had an estimated tax penalty assessed in the past 3 years
- You’ve received reasonable-cause relief from penalties in the past
- You received an FTA more than 3 years prior to the tax year with the present penalty
FTA and the Reasonable Cause AssistantIn order to determine whether or not you qualify, the IRS uses a highly-debated decision-support software tool known as the RCA (reasonable cause assistant). Before this software was introduced, it was up to an IRS representative’s discretion to approve or reject an FTA. In order to eliminate bias, the RCA was introduced. However, the software has been criticized for yielding a higher percentage of disapproval ratings than it should. While IRS representatives have the ability to correct these decisions, they have often gone uncorrected by IRS personnel. If you are initially turned down by the Reasonable Cause Assistant, you have the right to ask an IRS representative to review the decision.
What Returns Qualify for FTA Relief?The following returns qualify for FTA relief:
- Income tax returns
- Form 1040 series, U.S. Individual Income Tax Return
- Form 1041, U.S. Income Tax Return for Estates and Trusts
- Form 1065, U.S. Return of Partnership Income
- Form 1120, U.S. Corporation Income Tax Return
- Form 1120S, S. Income Tax Return for an S Corporation
- Employment tax returns
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 943, Employer’s Annual Tax Return for Agricultural Employees
- Form 944, Employer’s Annual Federal Tax Return
- Form 945, Annual Return of Withheld Federal Income Tax
- Excise tax returns
- Form 720, Quarterly Federal Excise Tax Return
- Form 2290, Heavy Highway Vehicle Use Tax Return
- Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return
- Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return
- Form 990 Series, Return of Organization Exempt from Income Tax
- Form 1096/1099, Annual Summary and Transmittal of U.S. Information Returns (regarding failure to file information statements, such as Forms 1099, W-2G and 1098)
- Form W-3/W-2, Transmittal of Wage and Tax Statements (regarding failure to file Forms W-2)
- Form 5500 Series, Annual Return/Report of Employee Benefit Plan
- Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (and other international information returns)
Methods for Requesting Penalty ReliefTaxpayers may request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three different ways. Depending on the circumstances and the situation, here are the methods by which you may apply for penalty relief and abatement:
- Before the IRS assigns a penalty, you may be able to preemptively prevent them from doing so.
- You should file a penalty non-assertion request with a paper return to request that the IRS does not automatically assess a penalty.
- If the IRS has already assigned you a penalty, you may request a penalty abatement retroactively.
- Simply send a letter (with the help of a tax professional) or call the IRS directly.
- Even if you’ve already paid your penalty, you’re still eligible to file for a penalty abatement.
- Using Form 843 (claim for a refund and request of abatement), you must file a claim within three years of the return due date or filing date, or within two years of the date, the penalty was paid.
- Form 843 may also be used for trust fund recovery penalty abatements as well.
FTA: Sample Penalty Abatement LetterIf you want an understanding of what the IRS is looking for, you may send a sample penalty abatement letter. The letter should explain why your offense and provide evidence and examples as to why you deserve an IRS first-time penalty abatement. However, if you plan on sending a sample letter to the IRS for informational purposes, you are much better off calling or seeking the advice of a professional tax representative. A taxpayer representative may call the IRS Practitioner Priority Service (PPS) line to request a penalty abatement on behalf of their client—speeding up and simplifying the process. If the thought of taking on the IRS by yourself is too daunting, you can sign a simple power of attorney document and allow a tax representative to handle all our your dealings with the IRS for you.
IRS Penalty Abatement ConsiderationsIRS penalty abatements and IRS first-time penalty abatements only apply to one tax year or period. If a request for penalty relief is being considered for two or more tax years or periods (and meets FTA standards), penalty relief will be based on the earliest year or period. Penalty abatement subsequent tax years will be based on other relief provisions, such as reasonable cause criteria, like a major disasters or financial crisis. Not everyone will qualify for an IRS first-time penalty abatement, here are some so considerations to keep in mind before you apply:
Filing ComplianceYou will not qualify if you haven’t filed (or filed for an extension) on all required returns. If you have an outstanding debt as a result of your returns from the IRS, this will disqualify you as well.
Payment ComplianceYou must have paid, or made arrangements to pay all taxes due with the IRS in order to qualify (an installment agreement will suffice as long as the payments are current).
Clean Penalty HistoryIf you have prior penalties on your records (except an estimated tax penalty) for the past three years, you will be disqualified from a penalty abatement. However, if you have received reasonable cause relief in the past, you’re still eligible for IRS first-time penalty abatement.
FTA: Additional GuidanceFor more information on FTA and the Reasonable Cause Assistant, refer to the following tax codes:
- IRM 184.108.40.206.6, Reasonable Cause Assistant (RCA)
- IRM 220.127.116.11.3.2.1, First Time Abate (FTA)
- IRM 18.104.22.168, Criteria for relief from penalties