The IRS today clarified its policy with regard to abatement of certain penalties for first time offenders.  The policy was modified to clarify that relief applies only where the taxpayer is current with all tax filings and tax payments. See IRM 20.1.1.3.6.1.

WHAT IS FIRST TIME ABATE?

First Time Abate policy (FTA) is an IRS special relief policy that removes assessed penalties under the following general guidelines:

• The relief is a one-time abatement.  There are no second chances at bat.  You get the relief once.
• The relief applies to the following penalties:
  • Failure to file a required return under IRC §§ 6651(a) (1) (individual returns), 6698 (partnership returns) & 6699 (S Corp. returns).  This penalty is 5 percent for each month or portion of a month the failure to file continues up to a maximum of 25%
  • Failure to pay taxes assessed IRC §§ 6651(a) (2) & IRC 6651 (a) (3).  This penalty is 1/2 percent per month or part of a month that the failure to pay continues and also maxes out at 25%. 
  • Failure to deposit taxes which you are required to deposit under IRC § 6656.  This penalty ranges from 2 percent to 15 percent of the amount not timely deposited depending on how many days late is the deposit and whether IRS has notified you of the delinquency.

Thus, the penalties alone (putting interest aside) can grow to a very large and imposing amount.

• To obtain the one-time relief for your first transgression you must:
  • Have filed all required returns or has filed or obtained a valid extension of time to file.
  • Have paid or made arrangements to pay (e.g., installment agreement) all tax currently due.
  • Have not previously been required to file or if returns were filed, had no penalties in the last three years (An estimated tax penalty will not disqualify you for FTA).
  • If multiple periods are involved (e.g., payroll tax quarterly returns), FTA will apply to the earliest period that meets the FTA criterion.
  •        For payroll taxes, the FTA applies to only one tax period.

WHEN IS FTA NEVER AVAILABLE?

The FTA relief is never available for some penalties such as those on event based late filed returns or unpaid tax such as for Form 706, U.S. Estate Tax Return, or Form 709, U.S. Gift (and Generation Skipping Transfer)Tax Return, or on Form 1120, or Form 1120S if returns were filed and a penalty assessed within the past three years.

Taxpayers who cannot establish “reasonable cause” for the delinquency should request First Time Abatement.  

FIRST SEEK “REASONABLE CAUSE” PENALTY WAIVER OR ABATEMENT

For penalties not eligible for FTA, IRS will consider whether the taxpayer has “reasonable cause” for the late filing, late payment or late deposit. IRS will base decisions on removing any future failure to file, failure to pay or failure to deposit penalties on any information taxpayers provide that meets “reasonable cause” criteria.

“Reasonable cause” abatements require proof but offer more advantageous relief than FTA. For FTA, you must have a clean record for three years. For “reasonable cause”  you aren’t limited by the three-year rule.  You qualify for abatement as often as “reasonable cause” is present, although habitual non-filers will find it hard to locate a good excuse.  If you’ve used “reasonable cause” to abate a penalty, you can still receive FTA in a subsequent year within the three-year look-back period.  Your record is deemed to be clean.   Thus, if facts merit, request a “reasonable cause” waiver or abatement before seeking a FTA.

To qualify for an abatement of penalties on grounds of “reasonable cause”, you must have an acceptable excuse.  The IRS generally will accept as “reasonable cause” excuses those instances when the non-filing or non-payment was not in your power to prevent. Some possible excuses that might establish “reasonable cause” are:

• You lost your job without warning.
• Your home was foreclosed
• You were suffering, at the time, from a physical or mental health condition, including addiction, or alcoholism.
• You were at the time severely depressed from, for example, the death of a loved one.
• You divorced and, as a result, your income was suddenly and substantially reduced.

Taxpayers billed for penalty charges who feel they have “reasonable cause”, should send their explanations with their bill to their IRS Service Center or call the IRS at the telephone number indicated on the bill for assistance. Taxpayers may also use Form 843, Claim for Refund and Request for Abatement, to request a refund or abatement of the first time penalty or where “reasonable cause” exists for the late filing, late payment or failure to deposit.

 See IRM 20.1.5.6.1 dealing with penalty relief.

 © 2013 by Robert S. Steinberg, Esquire
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