IRS tightens penalty relief.

• Author: Heroux, Mark S.

Recent IRS actions suggest a movement away from granting penalty relief. The IRS has modified its first-time abate (FTA) administrative waiver policy, making an FTA more difficult to obtain. Moreover, a number of recent court cases suggest that the IRS will be less willing to resolve penalty issues when there is an underpayment of tax from undisclosed financial assets. Recent budget cuts, furloughs, and negative press have exacerbated the trend by significantly decreasing IRS resources, resulting in slower responses to taxpayer inquiries.

Failure-to-File and Failure-to-Pay Penalties and FTA

The FTA is established in Internal Revenue Manual (IRM) Section 20.1.1.3.6.1. IRM Section 20.1.1.3.2.2(2)(B) contains this FTA policy:

Check the preceding tax years (at least three) for payment patterns and the taxpayer's overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care. If this is the taxpayer's first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for reasonable cause. As a practical matter, the IRS has routinely granted FTAs for a variety of failure-to-file, failure-to-pay, and failure-to-deposit penalties. It is worth noting that the IRS generally applies FTA on a penalty-by-penalty basis. That is, a taxpayer's FTA for failure to file in one year does not preclude that taxpayer from obtaining an FTA for failure to pay in the next year. Practitioners, however, must always be mindful that FTA is a discretionary policy. That is, FTA is not required by law.

On April 5, 2013, the IRS updated the FTA policy, stating, "Penalty relief under FTA will be limited to those taxpayers that are current with filing and payment requirements" (IRM Procedural Update, SBSE-20-0413-0690 (4/5/13)). Thus, taxpayers must be current with all filing and payment obligations to obtain an FTA. It is noteworthy that the procedural update considers a taxpayer current with payment obligations if that taxpayer has established an installment agreement. It is more noteworthy that many front-line IRS employees apparently conclude that a taxpayer whose return is on extension is not current with filing requirements.

Accuracy-Related Penalties and FTA

The IRS generally will not apply an FTA to Sec. 6662 accuracy-related penalties, even though the fact that a taxpayer has never made an error on a tax return suggests that this first error was an...