For the 2018 Tax Year, the IRS accessed roughly 29 billion dollars’ worth of civil penalties for individuals, estates, and trusts. Luckily, almost 12 billion dollars’ worth of charges were successfully abated (removed).
The IRS will provide administrative relief for a single return/period for certain penalties if the taxpayer has a history of staying current with laws and procedures. This is known as the First Time Penalty Abatement (FTA). This administrative waiver was implemented in 2001 and is effective for penalties dated back to that date.
Although very misleading by its name, this abatement is NOT limited to a once in a lifetime use. As long as a taxpayer passes the 3-year look back period, the same taxpayer could benefit from multiple first time penalty abatements. The waiver not only removes associated penalties but also the applicable interest.
* Estate and gift tax returns do not qualify for FTA waivers.
* FTA doesn’t apply to the estimated tax and accuracy penalties
*FTA only applies to one tax year/period. One tax year for individual and business income taxes and one quarter for payroll taxes. Reasonable cause criteria must be met for the remaining tax periods.
To qualify for FTA, the taxpayer must meet the following criteria:
Filing compliance: Must have filed or filed a valid extension for all required returns and can’t have an outstanding request for an unfiled return from the IRS. A Substitute For Return (SFR) qualifies as a filed return.
Payment compliance: Must have paid or arranged to pay all tax due. Taxpayers can be in an open installment agreement if the payments are current. Being in Currently Not Collectible (CNC) does not qualify as being current.
Clean 3-year penalty history: Has no prior penalties for the preceding three years. The estimated tax penalty is an exception and wouldn’t disqualify you from receiving FTA. Prior penalties that the IRS abated for reasonable cause also don’t disqualify you from FTA.
How To Make the Request:
Request penalty abatement by phone (Preferred Method) – Taxpayers may call the IRS at 1-800-829-1040 or the IRS Penalty Assistance Line at 1-855-223-4017 X-225 to request FTA. (Always jot down the date of the call, the agent’s name and the agent’s identification number)
A letter (3502C, 3503C or 168C) is typically mailed out within 10-14 days confirming the removal of penalties and interest. If the taxpayer doesn’t receive the letter within 30 days from the date of the call, it is advisable to follow up with the IRS.
Request penalty abatement by mail/letter – Include all relevant information in the request (taxpayer name, identification number, tax year/period, tax form and penalty type and amount). Clearly state that the taxpayer meets the FTA criteria. Consider attaching transcripts that prove filing/payment compliance and a clean penalty history.
TIP #1: The failure-to-pay penalty will continue to accrue, until the tax is paid in full. It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the Service’s first time penalty abatement policy.
TIP #2: If you are certain you have reasonable cause for the penalty, request the reasonable-cause argument FIRST. State that the IRS should abate the penalty only on those grounds. This strategy allows you to use the FTA waiver for a subsequent year just in case you need it. Remember: abatements due to reasonable cause will not disqualify you from receiving an FTA.
What Happens To The Removed Charges?
If the taxpayer does not have a balance due and the Refund Statute Expiration date has not expired (3 years if filed within the original due date or 2 years since tax was paid) the taxpayer should file Form 843,Claim for Refund and Request for Abatement to receive a REFUND.
If the Refund Statute Expiration date has expired and the taxpayer does not have a balance, the taxpayer receives NO benefit.
If the Refund Statute Expiration date has expired and the taxpayer does have a balance on any year the FTA amount MIGHT be applied to the oldest balance first until it is depleted.
IRS Abatement Determinations Often Unreliable
When the taxpayer calls or writes the IRS to request an FTA, the IRS evaluates the request using an automated software called Reasonable Cause Assistant (RCA). The RCA is well known for yielding a high percentage of incorrect determinations of eligibility. Part of the confusion is due to the RCA being unable to determine if the taxpayer has filed all returns and paid, or arranged to pay, all tax currently due. The IRS personnel is aware of this issue but generally do not correct it automatically. Even if an assister denies the FTA, check your transcripts, call/write them again and challenge their decision. Through persistence, a taxpayer can often persuade the IRS to REVERSE the initial incorrect determination that a taxpayer does not qualify for an FTA.
If you are currently being audited or suffering from back taxes and penalties, book an online consultation here or call now at 404-449-1528! At Credence Tax Services LLC, we use strategic approaches to maximize any/all opportunities to save our client’s money!