Qualifying and Requesting IRS First Time Penalty Abatement Waiver
First-time penalty abatement (FTA) is when the IRS removes penalties from your taxes owed. That includes penalties for failure to file, failure to pay, and failure to deposit. The IRS also removes interest related to those penalties. It applies to the tax periods ending after December 31st, 2000, and it is sometimes, called one-time forgiveness. In March 2023, the Internal Revenue Manual was updated with changes to the FTA program (discussed below).
Which Penalties Does the First Time Penalty Abatement Cover?
The FTA erases failure-to-file penalties for 1040s (individuals) and S-Corps. The IRS considers a Substitute For Return (SFR) as a filed return. In either case, this is a stiff penalty for failing to file or filing late. The penalty is 5% of your balance per month.
The FTA also eliminates the failure-to-pay penalty for 1040s (individuals). This penalty is 1/2 percent (.5%) of your outstanding taxes owed per month. If you have penalties related to an audit, you may be able to get rid of those as well (but not accuracy-related penalties).
Finally, the FTA also erases penalties related to a Failure to Deposit (941s) regarding payroll taxes (employment taxes). This would include things such as the deposit wasn’t made timely, for the correct amount, or in the correct manner.
How to Qualify for the First Time Penalty Abatement (FTA)
To qualify for this penalty abatement, you must meet three basic criteria:
1. You incurred no penalties or penalty abatements for the three prior tax years to the year you are requesting an FTA for.
The IRS only considers penalties that exceed $100. For example, if you received a $50 penalty in one of the previous three years, you can still qualify for the abatement.
If you incurred penalties for underpaying estimated tax in previous years, don’t worry. The IRS does not take those penalties into account. You can still qualify for the first-time penalty abatement.
2. You have filed an original return for the year you are requesting an FTA for and the 3 prior years (look back period).
3. You are no longer required to be in a payment agreement if any outstanding balances exist to request FTA (IRM update March 2023).
How to Apply for a First Time Penalty Abatement
Taxpayers may apply for first-time penalty abatement online, in writing, or over the phone. In most cases, you can make the request over the phone but you can leverage Form 843. In some cases, if you qualify, the IRS removes the penalties on the spot. In other cases, the IRS agrees to remove the penalties, but it does not do so until the tax owed is paid in full. To get an FTA, the taxpayer has to have an outstanding balance or the RSED (refund statute expiration date) for the FTA year in question cannot be expired.
If the IRS refuses to remove the penalties right away, you will continue to see the penalties growing. As long as you qualify for the abatement, you don’t have to worry about that. The penalties will be removed eventually.
How Much Can Be Abated
The IRS only removes penalties incurred in the first year. There is a monetary limit on the number of penalties that can be removed. The agency has not published a limit, but it appears to be up to $10,000 for most phone calls. Taxpayers can get an FTA over $10,000 but generally requires the request in writing. Furthermore, the IRS allows the FTA once every four years.
Abatement for Penalties More Than a Year Old
If you have tax penalties that extend back more than a year, or you intend to abate other types of penalties (e.g. Accuracy Related Penalty) the IRS will only remove them if you show “reasonable cause.” That means that you had a serious reason for not paying or filing your taxes. To qualify, the situation must be out of your control. However, you must also show that you took steps to get past the issue. Basically, the IRS wants to see that you really tried to comply, but that it truly wasn’t possible. In most cases, you will want to leverage Form 843 and attach a letter explaining the circumstances showing why you were unable to comply.
Examples of Reasonable Cause
There are a number of situations that can constitute reasonable cause. Here are some of the most common reasons accepted by the IRS:
- Records destroyed by flood, fire, or natural disaster
- Inability to calculate the amount owed due to a lack of records
- You were in Rehab or Prison
- You were held hostage in another country
- A close family member (spouse, child, etc) died
- A civil disturbance such as a mail strike prevented you from making payment
- You received bad information from a tax professional
- Bad advice from an IRS representative
In many cases, you may want to appeal or have a tax professional appeal on your behalf if a penalty abatement request is initially denied. Some important questions to consider:
- Do you have good reason that relates to why you were unable to comply?
- Do the dates and times coincide?
- If business related, can you show documentation that shows that business care or prudence was used?
- Have you abated tax penalties in the past and what is your compliance history?
In some cases, you can even receive an abatement for an error. However, you need to demonstrate that the error was made in good faith. The IRS may also accept other reasons. You should show that the issue created a situation where you truly couldn’t pay or file on time.
The IRS offers first-time penalty abatement and abatement for reasonable cause for other years or other types of penalties. However, many taxpayers don’t even know about these programs.
If you are looking for assistance with a tax professional who has penalty abatement experience, start a search below.