First Time Penalty Abatement
One of the first questions I’m typically asked from clients that are interested in resolving outstanding liabilities with the IRS is whether the IRS will waive the penalties that come along with failing to file or failing to pay tax owing in a timely manner. While the IRS is required by Congress to charge interest on delinquent tax balances, they do have some leeway to abate the penalties they’ve assessed. While most penalties can be abated if a taxpayer can show that the non-compliance giving rise to the penalties was due to reasonable cause, the fact of the matter is that the IRS’s threshold for what constitutes reasonable cause is very high (future article coming soon), meaning most instances of non-compliance simply don’t lend themselves to reasonable cause abatement. However, many taxpayers are eligible for penalty abatement under the IRS’s First Time Penalty Abatement guidelines.
Though First Time Penalty Abatement has been an option for taxpayers seeking relief from failure-to-file (FTF), failure-to-pay (FTP), and failure-to-deposit (FTD) penalties since the early 2000s, the program is not widely publicized, and as a result, many taxpayers fail to take advantage of the opportunity it affords to save potentially thousands of dollars in the course of resolving their IRS tax liabilities.
The IRS updated Internal Revenue Manual guidelines related to First Time Penalty Abatement in November of 2017, and as a result, much of the information online related to the program is somewhat outdated. As is presently stands, taxpayers are eligible to request the abatement of FTF, FTP, or FTD penalties associated with their first period of non-compliance, provided they were not assessed any penalties in the three years preceding the year for which they are seeking abatement. While the IRS used to allow First Time Abatement in instances where there were penalties of a de minimis amount in the preceding three years, the recent update to the IRS guidelines state that any unreversed penalty (with the lone exception of failure to pay estimated taxes penalties) during the three-year lookback period will disqualify a year for eligibility for abatement. In addition, First Time Abatement is only available for penalties assessed on tax periods after 2000. In the case of failure-to-deposit penalties, only the first quarter of the tax year qualifying for abatement is eligible to be abated.
In order to qualify for First Time Abatement, a taxpayer must have paid or arranged to pay any tax owing. Once a taxpayer has established an installment agreement to repay their tax liability, a call can be made to the IRS to request First Time Abatement. If a period qualifies, the IRS will abate the penalties associated with that period. However, if the taxpayer is still paying off the balance of tax on the year for which penalties are abated, the IRS computer systems will begin accruing FTP penalties on the balance again until it is paid in full. While a taxpayer can only request First Time Abatement for one period, it can be requested twice for the same tax period, so once the balance has been paid in full a taxpayer would be well advised to call in and request that any penalties that have accrued since initial penalty abatement also be abated.
I have had the IRS agree to abate penalties of several thousands of dollars over the phone, however if the amount eligible for abatement exceeds an undisclosed threshold, the IRS will require that a request be made in writing. There is no ceiling to the amount of penalties that can be abated through a written request for First Time Abatement. As a result, it is often a quick and easy way for taxpayers to save thousands of dollars that the IRS would otherwise expect them to be able to pay back. As eligibility for First Time Abatement can often inform the decision regarding which approach should be taken in attempting to resolve an IRS tax liability, taxpayers are well served to have a tax professional review their IRS transcripts to determine eligibility prior to attempting to negotiate a resolution with the IRS.