As former IRS agents and managers we understand the process of how to remove IRS tax penalties if in fact you qualify for penalty relief.
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Penalties and Abatement
In fiscal 2012, the IRS assessed 37.9 million penalties against taxpayers totaling $26.8 billion.
Individual, business, and payroll penalties for failure to file, failure to pay, and failure to deposit (the types potentially eligible for FTA) were 74% of all penalties assessed in 2012.
The IRS assesses most of these penalties automatically, regardless of the taxpayer’s situation.
IRS Tax Methods for Requesting Penalty Relief for Abatement
Taxpayers can request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three ways, depending on their situation.
Facts you should know:
- Before the IRS assesses a penalty, the taxpayer can file a penalty nonassertion request with a paper return to request that the IRS not automatically assess a penalty. Most taxpayers are unaware of this option.
- After the IRS has assessed a penalty, the taxpayer can request penalty abatement, typically by writing a penalty abatement letter or by calling the IRS. .
- After the taxpayer has paid the penalty, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement. The taxpayer must file the claim within three years of the return due date or filing date, or within two years of the date the penalty was paid.
General Reasons to Request IRS Penalty Abatement
Relief from penalties falls into four separate categories:
1. reasonable cause,
2. statutory exceptions,
3. administrative waivers, and
4. correction of IRS error.
Under the category of administrative waivers, the IRS may formally interpret or clarify a provision to provide administrative relief from a penalty it would otherwise assess.
The IRS may address an administrative waiver in either a policy statement, news release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions.
The most widely available administrative waiver is FTA.
First-Time Abatement Waiver
In 2001, the IRS established FTA to help administer the abatement of penalties consistently and fairly, reward past compliance, and promote future compliance.
This administrative penalty waiver allows a first-time noncompliant taxpayer to request abatement of certain penalties for a single tax period—one tax year for individual and business income taxes and one quarter for payroll taxes.
According to TIGTA, for tax year 2010, the average individual failure-to-file abatement qualifying under FTA was $240, and the average failure-to-pay abatement was $84.
However, more than 90% of individuals who qualified for an FTA did not receive the waiver for 2010.
This is likely because taxpayers did not know they could request it.
The IRS does not publicize FTA as a relief option on its penalty-related notices or on its website.
The remainder of this article discusses how to determine whether a client qualifies for FTA and how to request it from the IRS.
Penalties Eligible for an FTA
FTA applies only to certain penalties and certain returns filed.
First, determine whether FTA applies to the client’s situation:
- Individual taxpayers can request an FTA for failure-to-file and failure-to-pay penalties. Estate and gift tax returns do not qualify for FTA waivers.9
- Business and payroll taxpayers can request an FTA for failure-to-file, failure-to-pay, and/or failure-to-deposit penalties. The IRS is not explicit in its Internal Revenue Manual (IRM), but in practice, the IRS has granted FTAs for S corporation and partnership late-filing penalties.10
- For individual and business taxpayers, the estimated tax and accuracy-related penalties cannot be waived under FTA.
VERY IMPORTANT NOTE – Clean Compliance Criteria
If FTA applies to the client’s situation, the practitioner must determine whether the client qualifies to receive it, which entails most of the complexity involved in requesting an FTA. To qualify, the client must demonstrate filing and payment compliance and a three-year clean penalty history.
To meet the rule for filing compliance, the client must have filed, or filed a valid extension for, all currently required returns and must not have an outstanding request from the IRS for an unfiled return.
To meet the payment compliance rule, the taxpayer must also have paid, or arranged to pay, any tax due.
The client can have an open installment agreement, as long as installment payments are current.
According to the IRM, the IRS should give a taxpayer not currently in compliance with these payment requirements an opportunity to comply and thereby qualify for an FTA before the IRS considers whether the penalty can be abated for reasonable cause.
To meet the rule for clean penalty history, the client cannot have had penalties of a “significant” amount assessed in the prior three years on the same tax return for which the client is requesting abatement.
IRS procedures do not publicly define a “significant” amount. In practice, the IRS has considered any penalty amount as significant in its application of the FTA qualification.
If the IRS rejects the client’s request because of a small penalty assessment, remind the IRS of the “significant” qualification in the IRM.
The client will not be disqualified from receiving an FTA based on lack of a clean penalty history if the client:
- Had a penalty assessed more than three tax years prior to the tax return in question.
- Had an estimated tax penalty assessed in the past three years.
- Received reasonable-cause relief from penalties at any point in the past.
- Received an FTA more than three tax years prior to the tax return in question.
- Has penalties on subsequent tax years.
How to Remove IRS Penalties, Former IRS Agent, Fresh Start Tax LLC
