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How Does First-Time Penalty Abatement Work?
The IRS has an administrative waiver that provides penalty relief for taxpayers who meet certain criteria. This waiver is called the IRS’s first time abatement or “FTA” and only applies to certain penalties. The FTA has been around since 2001 but few use it to abate their penalties.
`Here are the rules:
- FTA applies to 3 very common penalties: FTA is primarily directed at three common penalties. Failure to Pay (“FTP”- 48% of all civil penalties), Failure to File (“FTF” – 9% of all penalties), and Failure to Deposit (“FTD”) penalties for employers who remit payroll deposits.
- S corporation and partnership late filing penalties qualify for FTA: Yes. Late filing penalties for pass-through entities qualify for FTA.
- Look back 3 years for a clean compliance history: The last three years before the penalty year need to be penalty free, with the exception of estimated tax penalties. This means if you have a qualifying penalty in 2018, you cannot have a penalty in 2015-2017 and still qualify.
- Past estimated tax penalties do not qualify for FTA and do not disqualify you from FTA: If the taxpayer has an estimated tax penalty in the past three years, it will not disqualify the taxpayer from FTA.
- If you owe taxes, you can use FTA from any year past 2000: FTAs can only be “refunded” for the past three tax years or any penalty paid within the past two years (IRS refund statute rules). However, if you owe back taxes, you can use an FTA from 2001 to the current tax year to be offset against the amount owed.
- Accuracy penalties do not qualify for FTA: If you are audited or receive a CP2000, you may be assessed a 20% accuracy penalty in addition to the tax owed. Accuracy penalties do not qualify for FTA. However, the IRS provides an exemption for the accuracy penalty for negligence if it is the first time the taxpayer received a CP2000 notice.
- You must be in “good standing” with the IRS: This means all currently due returns have been filed, or a valid extension has been filed and, if you owe back taxes, you are in a collection agreement with the IRS.
- If you qualify, the IRS will classify a reasonable cause abatement as FTA if it applies: This is a new rule in 2018. If you qualify for penalty abatement for FTF, FTP, or FTD based on reasonable cause (you have reasons outside of your control, like sickness, that caused the noncompliance), the IRS will code your penalty abatement as FTA if the taxpayer has a clean compliance history. This will disqualify any penalty in the next 3 years from qualifying for FTA\
- FTA does not apply to any portion of an FTD penalty assessed for (Electronic Federal Tax Payment System (EFTPS) avoidance.
How do you find out if you qualify?
The easiest method to understand if you qualify and can use an FTA is to review your IRS account transcripts or ask a tax professional who is familiar with this IRS rule. Transcripts will show penalties applied, by year, and you can apply the rules above to check if you qualify.
Once you qualify, you can call the IRS penalty hotline (855-223-4017, ext. 225) or write the IRS.
For assistance creating a strategy to address your tax issue, visit Jackson Hewitt’s Tax Resolution Hub to see the various ways we can help you.
About the Author
Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.
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