The First-Time Penalty Abatement
Have you ever missed a payment to your credit card company? If so, you probably know that you can easily remove late fees with one phone call to your credit card company, because most banks will automatically forgive a late penalty upon request, as long as it was a first-time offense. What if instead of a missed payment to your credit card company, you neglect to file your tax return with the Internal Revenue Service? Is there a one-time grace for first time offenders? The short answer is mostly yes (although exceptions do apply).
The First Time Abatement (“FTA”) penalty waiver was implemented by the IRS in 2001 and it was designed to streamline abatements for late filers. Because FTA serves as an administrative waiver and is not specifically contained within the Internal Revenue Code, many individuals and even some tax advisers are unaware of this fast track for “abatement,” resulting in the reduction or elimination of a penalty. Only certain types of penalties may be waived under the FTA: Failure to file a tax return timely; failure to pay tax timely; and failure by a business to deposit taxes when due. Conversely, accuracy-related penalties cannot be waived under FTA. Moreover, only certain types of returns qualify, such as individual, C corporation, S corporation and Partnership tax returns, and certain quarterly returns. Federal Estate and Generation Skipping Tax Returns and Gift Tax returns do not qualify for FTA.
As long as the taxpayer has a history of compliance with his or her tax returns, the FTA should be an option to request abatement for most late filers, as long as the particular return qualifies. The Internal Revenue Manual (“IRM”) states that penalty relief under administrative waivers, including FTA, is to be considered and applied before a waiver for reasonable cause. This is designed mainly for efficiency, to help the IRS fast-track abatements for compliant taxpayers who are first-time offenders, without getting saddled with minutiae of considering abatement for reasonable cause.
The general criteria for qualifying for an FTA of a penalty are as follows:
- Individuals and businesses can request an FTA for a penalty for failure to file and for failure to pay taxes.
- Businesses can also request an FTA for a penalty for failure to deposit taxes.
- To be eligible:
- The Taxpayer must have filed all currently required returns or filed an extension of time to file.
- The Taxpayer must have paid, or arranged to pay, any tax due.
- The Taxpayer was not previously required to file a return or, if required to file, was not assessed with any penalties over the three tax years prior to the tax year in which the taxpayer received the penalty. (Penalties for estimated taxes do not count.)
- Note that an FTA is only available for a single return.
The IRM provides that a taxpayer does not have to specifically request penalty relief under the FTA waiver to be eligible. However, should the taxpayer wish to apply for the waiver, the FTA request may be made orally or in writing.
A tax practitioner must have authority under a power of attorney to speak on behalf of a taxpayer. An FTA waiver can be granted over the phone or in writing. If the penalties are removed, the IRS will notify the taxpayer in writing. If the amount in question is substantial, telephone authorization may be unavailable.
Tax practitioners may call the IRS Practitioner Priority Service (PPS) line to request FTA. The Practitioner Priority Service is a professional support line staffed by IRS customer service representatives specially trained to handle tax practitioners’ accounts questions. Tax practitioners may contact PPS at (866-860-4259). PPS is available to all tax professionals with valid third-party authorizations, i.e., Forms 2848, 8821 and/or 8655. However, if the case is being handled by a specific compliance unit, such as Employee Plans (https://www.irs.gov/retirement-plans/employee-plans-compliance-unit-epcu), your request for FTA should be made to the unit assigned.
When requesting an FTA penalty waiver, certain items should be included in any written request:
- Taxpayer name and identification number;
- Tax year in question;
- Applicable Tax Form/Return;
- History of compliance;
- Type of penalty
- Amount of penalty; and
- A clear statement that FTA criteria are met.
The taxpayer may also wish to order and include an IRS transcript to demonstrate a history of compliance. Transcripts are available at https://www.irs.gov/individuals/tax-return-transcript-types-and-ways-to-order-them. A “Record of Account Transcript” shows tax return and tax account activity, along with items from your return(s), forms and schedules, as well as changes you have made after filing.
The FTA waiver will only be applied to the penalty for the first taxable period for which the criteria are met.
If the FTA is denied, the taxpayer may consider seeking an abatement for reasonable cause by filing a Form 843, Claim for Refund and Request for Abatement. The taxpayer may also consider the option of taking the matter to Appeals. Appeals not only may recommend the abatement or non-assertion of a penalty based on the criteria discussed above but may also consider one additional factor in making its determination: “hazards of litigation.”