First Time Penalty Abatement
November 25, 2019
Receiving an IRS penalty notice can be alarming. Ignoring it can be a costly mistake. If you qualify, the IRS does offer relief with a first time penalty abatement (FTA).
First time penalty abatement is available for three types of penalties:
- Failure-to-File: If you owe tax and don't file on time, the failure-to-file penalty is usually 5% of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there's also a minimum penalty for late filing; it's the lesser of $210 (for tax returns required to be filed in 2019) or 100% of the tax owed.
- Failure-to-Pay: if you file a return but don't pay all tax owed on time, you'll generally have to pay a late payment penalty. The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid ten days after the IRS issues a notice of intent to levy property. If you file your return by its due date and request an installment agreement, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect.
- Failure-to-Deposit (941s): This is regarding payroll taxes and whether the deposits are made timely, for the correct amount and in the correct manner. Typically, penalties are as follows: 2% penalty on deposits made one to five days late; 5% penalty on deposits made six to 15 days late; 10% penalty on deposits made 16 or more days late, but before ten days from the date of the first notice the IRS sent asking for the tax due and 15% penalty on amounts still unpaid more than ten days after the date of the first applicable IRS notice.
If your penalty does qualify, you must also meet certain criteria for an FTA:
- You didn’t previously have to file a return or you have no penalties for the three tax years prior to the tax year in which you received a penalty, unless there’s reasonable cause. Also, penalties for underpaying estimated tax will not preclude you from qualifying.
- You filed all currently required returns or filed an extension of time to file.
- You have paid, or arranged to pay, any tax due. Note: Being in Currently Not Collectible status does not qualify as compliant as it’s not an arrangement to pay.
IRS IRM (Internal Revenue Manual) 18.104.22.168.2 (11-21-2017) states that reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but was nevertheless unable to comply with those obligations. Examples of reasonable cause are natural disasters, death and serious illness, erroneous advice or reliance, mistakes and even forgetfulness.
Strategically, if the client has reasonable-cause grounds for an abatement, present that argument first and request the abatement on those grounds. The client may need to use the FTA waiver for a subsequent year, and abatement due to reasonable cause will not disqualify the client from receiving an FTA.
FTA may be applied for online, in writing or over the phone with the IRS. If you’ve already paid the penalty, you may file Form 843, Claim for Refund and Request for Abatement, to request a refund.
If the IRS doesn't grant penalty relief, consider taking the case to Appeals.
Taxpayers often wonder about abating interest. The IRS does not provide relief from interest. It must charge interest by law so you will continue to accrue interest until you have paid your account in full. However, if any penalties are reduced because of such provisions as reasonable cause or first time abatement, the related interest is also reduced automatically.
If you’ve received an IRS penalty notice, don’t panic. You have a right to challenge the penalty. Simply put, “If you don’t ask, you don’t get.” However, it is knowing what and how to ask that is the key.