IRS First Time Penalty Abatement: How It Works
Penalties can create a huge increase in the tax debt owed by an individual or business. It can quickly turn a tax debt situation from bad to worse. Seeking professional help to better understand how an IRS first time penalty abatement works will prove beneficial.
The IRS will waive or remove (abate) certain penalties. There are 3 methods to obtain penalty abatement including, first-time penalty abatement, penalty abatement due to reasonable cause and penalty abatement due to statutory exception.
Let’s look at IRS first-time penalty abatement (FTA). The IRS may grant the FTA to relieve taxpayers from failure-to-pay, failure-to-file and failure-to-deposit penalties (certain criteria have to be met). Despite the advantages of the IRS first time penalty abatement, few taxpayers who qualify for FTA request it.
Do You Qualify for the IRS First Time Penalty Abatement?
To qualify for the FTA waiver, you must meet the following criteria:
- No history of penalties – You must not have penalties for the preceding three years
- Payment compliance – You must have paid, or arranged to pay all tax due (can be in an installment agreement)
- Filing compliance – Must have filed all required returns (or filed a legitimate extension for) all required returns. You can’t have any outstanding request for a return from the IRS
Which Penalties Does the FTA Cover?
IRS first time penalty abatement is available for three types of penalties:
- Failure-to-file (FTF) – If you fail to file or file late, the penalty is usually 5% of the taxed owed
- Failure-to-pay (FTP) – The standard FTP penalty is 0.5% a month. If the IRS issues a notice of intent to levy and you don’t respond, it increases to 1% in 10 days. If you enter into an installment agreement, the penalty falls to 0.25% a month
- Failure-to-deposit (941s) – This is concerning payroll taxes and deposits (timely, for the correct amount and in the correct manner). The penalty is 2% on deposits made 1 to 5 days late, 5% on deposits made 6 to 15 days late, 10% penalty on deposits made 16 or more days late, but before 10 days from the IRS first notice. A 15% penalty applies to all amounts still unpaid more than 10 days after the first applicable IRS notice
How to Apply for the IRS First Time Penalty Abatement
As a taxpayer, you may apply for IRS first time penalty abatement over the phone, in writing, or online. In some cases, if you qualify, the IRS removes the penalties immediately. In other cases, the IRS agrees to remove the penalties, but it does so when the tax debt is paid in full.
1. Request penalty abatement by phone.
- We call the IRS Practitioner Priority Service (PPS) at 866-860-4259 if your case isn’t being handled by a compliance unit (examination, collection, etc.)
- If your case is being managed by a compliance unit, we call the unit to request IRS first time penalty abatement.
- The IRS personnel should be able to pull your account, determine if the criteria are met and apply the FTA during the call.
- We also write a letter to confirm the over the phone conversation (we include the agent’s name, the agent’s identification number and the date of the call).
- Later, the IRS sends a letter (3502C, 3503C or 168C) by mail indicating the penalties were removed. We follow up with the IRS if you don’t receive the letter within 30 days.
2. Request penalty abatement online.
We can use the IRS e-services Electronic Account Resolution function to request for FTA. If you meet the criteria, the representatives in Accounts Management can grant an IRS first-time penalty abatement
3. Request penalty abatement by mail/ letter.
Normally, we prefer a phone call approach since the penalties can be removed quickly during the phone call. However, the penalty may be too high for the IRS to abate over the phone.
- If so, we write a letter to the IRS to request FTA on behalf of our client.
- We include all information in the request (taxpayer’s name, identification number, tax year, tax form and penalty type and amount).
- We clearly state you’ve met the IRS first-time penalty abatement criteria. We may attach transcripts proving your filing or payment compliance, a clean penalty history and a valid power of attorney (Form 2848).
Keep in Mind
- Individual taxpayers can request an FTA for failure-to-file and failure-to-pay penalties.
- Business and payroll taxpayers can request IRS first-time penalty abatement for failure-to-file, failure-to-pay and/or failure-to-deposit penalties.
- Though the IRS is not explicit in its Internal Revenue Manual (IRM), in practice it has granted first-time penalty abatement for S corporation and partnership for late filing penalties.
- Estate and gift tax returns do not qualify for IRS first-time penalty abatement.
- For individual and business taxpayers, the FTA cannot cover accuracy-related waivers.
- If you have already paid the penalty, you may request a refund by filing Form 843, Claim for Refund and Request for Abatement.
- If the IRS doesn’t grant penalty relief, you have a right to take the case to appeals. The IRS can make a different decision based on other factors
- IRS first time penalty abatement only applies to one tax year/period. For example, if 2 or more tax years are being considered for penalty relief and the earliest tax period meets FTA criteria, the penalty removal will only apply to that period. All other subsequent tax years will be based on other relief options, such as reasonable cause
Need to Better Understand IRS First Time Penalty Abatement?
If penalties are mounting, it’s time to get help. At True Resolve Tax, we have professional skills and experience to resolve your tax debt. We challenge every part of your debt, including penalties, interest and tax balance. We evaluate and explain all factors qualifying you for IRS first time penalty abatement.
As IRS Enrolled Agents, we prepare and submit legal forms needed to achieve successful first-time penalty abatement. We can handle the technical aspects of penalty waivers.