The Internal Revenue Service imposes millions of dollars in tax penalties every year. In Fiscal Year (FY) 2018, the IRS collected more than $55.5 billion in unpaid assessments on returns filed with additional tax due, netting over $40.6 billion after credit transfers. The government also assessed nearly $29.3 billion in civil penalties, and roughly $12.0 billion was assessed in civil penalties on individual and estate and trust income tax returns.
However, the good news is that the IRS will waive or remove certain penalties if a taxpayer has a track record of compliance in the past. This relief is called first-time penalty abatement or FTA.
Background
No one wants to pay excessive taxes and penalties, especially when the penalties appear to be uncalled for or unjust. Penalties can seem arbitrary or vindictive to taxpayers, but the IRS policy says that their rationale for these penalties is to deter taxpayer noncompliance, rather than to generate revenue.
Because of this reasoning, the IRS created the first-time penalty abatement administrative waiver 12 years ago. The waiver permits regularly compliant individual and business taxpayers to request removal of certain penalties that the IRS has assessed against them for the first time. In other words, the FTA is a one-time pass or “mulligan” for those taxpayers who haven’t been in trouble with the IRS before. This one-time penalty amnesty can save the taxpayer hundreds or even thousands of dollars.
The FTA is applicable to all failure-to-file, failure-to-pay, or failure-to-deposit penalties. However, it doesn’t apply to other types of penalties like the accuracy-related penalty, returns with an event-based filing requirement like Forms 706 or 709, and information reporting that is dependent upon other various filings. Let’s look at the specifics of FTA.
How to Determine If You Qualify for First-Time Abatement
The big question, of course, with the FTA, is whether you qualify. Unfortunately, this is also the most complicated part of requesting FTA. Let’s look at what you need to know.
- FTA is applicable only to certain penalties and certain returns.
For individual taxpayers, FTA is available for two of the most common penalties: the failure to file and the failure to pay penalties. And for business and payroll taxpayers, FTA applies to the failure to file, failure to pay, and/or the failure to deposit penalties. In addition, S corp and partnership late-filing penalties will qualify for FTA.
What penalties and returns don’t apply?
Estate and gift tax returns do not qualify for FTA. In addition, FTA doesn’t apply to the estimated tax and accuracy penalties. The reason for this is that accuracy penalties are based on the specific facts and circumstances for each person or business and each tax year or period.
However, the good news there is that like the rationale behind FTA, accuracy penalty responses often have considerable weight with the IRS if the tax payer has a proven track record of filing accurate returns on time and has made a good-faith effort to file accurately.
- The taxpayer must meet “the clean compliance criteria” rules to qualify for FTA.
To be eligible for FTA, your must have a clean three-year penalty history. This means that you can’t have any penalties of a “significant” amount in the past three years on the same type of tax return. Although the IRS doesn’t provide a precise definition of “significant amount,” the agency has in practice considered penalty amounts of $1 or more as significant. Also, you are required to have filed all required returns, and, if you owe money, you must be current on your payments to the IRS.
However, the estimated tax penalty is an exception. This wouldn’t disqualify you from getting FTA. Likewise, previous penalties that the IRS abated for cause do not disqualify you from FTA.
Also, it’s important to note that you can claim an FTA for only a single tax period.
The examiners at the IRS use a decision-support software tool called the Reasonable Cause Assistant (RCA) to help see if a taxpayer is eligible for an FTA. But the RCA has been known to produce a high percentage of incorrect determinations of FTA eligibility that IRS personnel generally don’t correct.
But with some effort and the help of a skilled tax resolution specialist, you may be able to convince the IRS to reverse an initial incorrect determination that you do not qualify for an FTA.
Takeaway
Everyone needs a second chance. FTA is a “do-over” of sorts that allows taxpayers with clean compliance to request the waiver of a tax penalty.
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