How to Request IRS First Time Penalty Abatement

Recent 2018 Changes: FTA only available for Tax Year 2001 forward.

  • Must not have received a FTF or FTP Penalty in the last three years.
  • No FTD in prior three years

IRS penalties add up very quickly and when they do it can effectively place an IRS installment plan out of reach of some taxpayers. For this reason, the first time IRS penalty abatement procedure is a very important tool for your IRS tax attorney to utilize.

The IRS sets forth certain conditions on when first-time abatement is available to a taxpayer.

  1. No penalties (or insignificant penalties well under $100) have been assessed for the 3 tax years (to failure to file or failure to pay or any accuracy related penalties in prior 3 years) prior to the tax year in which a penalty was assessed (or no return needed to be previously filed, e.g. for a new business); and
  2. The taxpayer has filed all currently required returns (or timely filed an extension); and
  3. The taxpayer has paid, or arranged to pay (i.e. on an installment agreement), any taxes that are due.

Important Notes

  • a 2210 IRS penalty for underpayment of estimated taxes, by an individual taxpayer, does not disqualify them from participating in the First Time Abatement program.
  • A SFR (substitute for return) qualifies as a filed return.
  • If there is a balance due, the taxpayer must be in an installment agreement in order to qualify for a first-time penalty abatement.
  • May want to consider bankruptcy BEFORE attempting to obtain a First Time Abatement.
  • Bankruptcy will wipe out whatever penalties have accrued prior to the most recent three years, while FTA will wipe out penalties that accrued in the most recent three years.
  • See note on how bankruptcy may help in the article: Dealing with Difficult IRS Agents.
  • Remember that this is only available once. So if the penalty is very low, and the client has a lot of tax paying years ahead of them, may want to pay the relatively-low penalty in full in case something more severe happens in the future.

https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-first-time-penalty-abatement-or-other-administrative-waiver

IRS assister uses an electronic Reasonable Cause Assistant and is able to provide real time answers on a phone call, with a letter confirming usually within a few weeks.

First Time Penalty Abatement (FTA)

First time penalty abatement is available for the following: 

Failure to File IRS Penalties (FTF)

How is the failure-to-file penalty calculated:

The IRS Failure-to-file penalty is usually 5% of the unpaid taxes for each month that the tax return is later (not to exceed 25% of the total amount of unpaid taxes).  

Failure to Pay IRS Penalties (FTP)

How is the failure-to-pay penalty calculated:

The IRS failure-to-pay penalty is usually 0.5% of unpaid taxes for each month that the taxes remain unpaid (starting the day after taxes are due, and not to exceed 25% of the total amount of unpaid taxes).

Failure to Deposit (941s) IRS Penalty (FTD)

All employers must file IRS Form 941 quarterly to report wages, tips received, withheld taxes and social security/medicare taxes.  

A proper deposit must be made: (i) timely; (ii) in the correct amount; and (iii) in the correct manner. If a proper deposit is not made (by violating any of the three essential components described above), the deposit is subject to a “failure to deposit” penalty per Internal Revenue Manual 20.1.4, with the heading: Failure to Deposit Penalty.

How is the failure-to-deposit penalty calculated:

The IRS calculates failure to deposit penalties by the number of days the employer has failed to make a timely deposit, in the correct amount and in the correct manner.

  • 2% if the deposit is <6 days late
  • 5% if the deposit is 6 - 15 days late
  • 10% if the deposit is 16> days late.

What is Reasonable Cause Abatement?

Can attempt to get an IRS penalty abatement for any reason that establishes that the taxpayer exercised ordinary business prudence and was still unable to comply with tax law. But this is not an avenue with which one should try to get creative.

Typically, the reasonable cause abatement is granted because the taxpayer, or someone in their immediate family, died/became seriously sick or incapacitated or the area was hit by a major business-disrupting hurricane or fire, which destroyed records.

After a tax penalty is abated

If a first time abatement is approved, your tax lawyer will usually know instantly (if dealing with an IRS tax assister over the phone). The taxpayer then receives IRS letter 3503C within two weeks - letting taxpayer know that the tax penalty was abated due to their good history of timely filing and paying their taxes.

How to Contact the IRS for a First Time Penalty Abatement

Taxpayer can call 800.829.1040 or the IRS Penalty Assistance Line: 855.223.4017 x. 225

Your IRS tax defense lawyer (after obtaining limited power of attorney for current year and prior three years) will call the PPS line: 866.860.4259 or the Penalty Assistance Line (same as above) to discuss up to three client IRS tax problems at a time.

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