First-Time Penalty Abatement: The History of the Waiver and its Applicability
So, you failed to file or failed to pay your taxes for the first time in your life and now the Internal Revenue Service is hitting you with a penalty. Guess what? With the First-Time Penalty Abatement waiver, this mishap may be forgiven.
History of the First-Time Penalty Abatement Waiver
Back in 2001, the IRS introduced the First-Time Penalty Abatement waiver (“FTA”) to assist taxpayers dealing with federal tax issues. The purpose of FTA is to ensure compliance for typically responsible taxpayers by providing a one-time waiver; however, FTA can only abate three types of penalties:
- Failure to Pay (IRC § 6651(a)(2),(3));
- Failure to File (IRC §§ 6651(a)(1), 6698(a)(1), or 6699(A)(1)); and
- Failure to Deposit (IRC § 6656).
To qualify for FTA, the taxpayer must not only have been assessed one of the aforementioned penalties, but also must have at least three years of “clean tax history” immediately prior to the year in which the FTA will be requested. In addition, the taxpayer must currently be “in compliance,” which means that all required returns (or extension for all required returns) have been filed and if any outstanding tax liability, that the liability has been paid or there is a payment arrangement in place.
Until November 2017, it was not entirely clear what constituted a “clean tax history.” Specifically, the Internal Revenue Manual, which contains instructions for IRS representatives to carry out all administrative and procedural matters, stated that if the taxpayer did not have “penalties of a significant amount” in the three preceding years, then the taxpayer may be eligible for FTA. However, the language in the Internal Revenue Manual has changed to “no penalties” within the three-year period prior to the year for which the taxpayer seeks abatement.
Due to the change in language in the Internal Revenue Manual, taxpayers that had de minimis penalties in prior years will no longer be able to argue that those penalties were not of a “significant amount.” As a result, FTA has been severely limited in scope.
How to Request First-Time Penalty Abatement
After the IRS has assessed the taxpayer penalties for failure to pay, file, or deposit, the taxpayer can request FTA by phone or in writing. The written request must include all relevant information to the request such as:
- Taxpayer name;
- Identification number;
- Tax year/period;
- Tax form;
- Penalty type; and
Similarly, a tax practitioner may call the IRS to request FTA. This process is much more efficient as penalties may often be removed quickly during these phone calls. However, depending on the severity of the penalty, the tax practitioner may have to submit a letter to the IRS requesting FTA.
What to do if the First-Time Penalty Abatement Request is Denied
If the taxpayer received IRS Letter 1277 or 854C, it means that the IRS has denied the request for FTA. Due to the Internal Revenue Manual’s change to allowing no prior penalties within the three-year lookback period, the denial for FTA was likely due to not meeting one of the requirements listed above.
However, if the taxpayer is certain that it meets the FTA qualification requirements, the taxpayer must respond to the determination letter within 60 days by following the steps listed in the letter. For more information on appealing a denied First-Time Penalty Abatement request, it is best to seek the assistance of a tax practitioner.
What to do if the taxpayer has already paid the penalty
After the taxpayer has paid the penalty for failure to file, pay, or deposit, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement. However, the taxpayer must file the form within three years of the tax return filing date or within two years of the date the penalty was paid – whichever is later.
If you have been assessed penalties and interest for failure to file, pay, or deposit, contact The Wilson Firm today to learn more about the First-Time Penalty Abatement waiver and your options going forward.