It is safe to assume that most taxpayers dislike paying taxes and hate paying IRS penalties, especially when the penalties seem unjust. While penalties can also seem arbitrary to taxpayers, IRS policy is clear and deliberate on their reason for existence: to deter taxpayer noncompliance, not to generate revenue. (1)
For that reason, 12 years ago, the IRS created the first-time penalty abatement administrative waiver (FTA), (2) which allows typically compliant individual and business taxpayers to request abatement, or removal, of certain penalties that the IRS has assessed against them for the first time. In effect, the IRS rewards typically compliant taxpayers with one-time penalty amnesty, which can save the taxpayer hundreds--sometimes thousands--of dollars.
Despite the advantages of this IRS waiver, few taxpayers who qualify for FTA request it, according to a 2012 report by the Treasury Inspector General for Tax Administration (TIGTA). (3) According to the report, the problem is twofold: Most taxpayers and tax professionals do not know FTA exists, and IRS representatives often incorrectly disallow an FTA when using the IRS's faulty automated decision tool to make penalty determinations.
In effect, FTA is hidden to most taxpayers and tax practitioners, who may not be aware of how it works, how to request it, or even its existence. This article explores the IRS FTA waiver and explains how to help clients remove certain penalties using it.
Penalties and Abatement
In fiscal 2012, the IRS assessed 37.9 million penalties against taxpayers totaling $26.8 billion. (4) 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. (5) The IRS assesses most of these penalties automatically, regardless of the taxpayer's situation.
Methods for Requesting Penalty Relief
Taxpayers can request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three ways, depending on their situation:
* 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.
* 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. Tax professionals can also request abatement using IRS e-services.
* After the taxpayer has paid the penalty, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement. (6) 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.
Reasons to Request Abatement
Generally, relief from penalties falls into four separate categories: reasonable cause, statutory exceptions, administrative waivers, and 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 200 I, 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. (7) 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. (8)
The remainder of this article discusses how to determine whether a client qualifies for ETA 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 ETA 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.
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...