Requesting a first-time abatement penalty waiver

The IRS’s first-time abatement (FTA) penalty waiver, although introduced 12 years ago, remains little known and often unrequested by qualifying taxpayers. It allows a first-time noncompliant taxpayer to request abatement of certain penalties for a single tax period.

Individual taxpayers may request an FTA of a failure-to-file or failure-to-pay penalty. Business taxpayers can request an FTA of those penalties or of a penalty for failure to deposit payroll taxes. Taxpayers may also qualify for a penalty waiver or abatement under other provisions, including for reasonable cause, as well as under statutory provisions such as the Sec. 7508 exception for taxpayers in the armed services serving in a combat zone, and under other administrative waiver provisions.

To qualify, the taxpayer must demonstrate filing and payment compliance and a three-year clean penalty history. To meet the filing compliance requirement, the taxpayer must have filed, or filed a valid extension for, all currently required returns and not have an outstanding request from the IRS for an unfiled return. To meet the payment compliance requirement, the client must also have paid, or arranged to pay, any tax due. The client can have an open installment agreement, as long as payments are current.

To satisfy the clean penalty history requirement, the client cannot have had penalties of a “significant” amount assessed in the prior three years on the same tax return for which the client is requesting abatement. If the IRS rejects the request because of a small penalty assessment, tax practitioners should remind the IRS of the “significant” qualification in the IRM.

The client will not be disqualified from receiving an FTA based on lack of a clean penalty history if the client:

• Had a penalty assessed more than three tax years prior to the tax return in question.
• Had an estimated tax penalty assessed in the past three years.
• Received reasonable-cause relief from penalties in the past.
• Received an FTA more than three tax years prior to the tax return in question.
• Has penalties on subsequent tax years.

A practitioner may request an FTA by telephone (866-860-4259), through e-services (tinyurl.com/a7ao7u5), or in writing. For a phone or electronic request, if the client’s case does not involve a compliance function, practitioners may call the IRS Practitioner Priority Service (PPS) line or use the IRS e-services Electronic Account Resolution (EAR) function. IRS Accounts Management representatives have authority to grant FTAs. There is an unpublished ceiling on the penalty amount that the IRS will abate under FTA by phone or e-services. The IRS will not confirm the ceiling, but this author’s experience indicates it may be $1,000 or more.

When requesting an FTA in writing, provide other penalty relief arguments, including reasonable cause, to increase the client’s chances of success. The request should be sent to the IRS service center where the client files paper returns.

If the client has reasonable-cause grounds for an abatement, present that argument first and request the abatement on those grounds. The client may need to use the FTA waiver for a subsequent year, and abatement due to reasonable cause will not disqualify the client from receiving an FTA.

If the client technically does not qualify for an FTA because of only one penalty assessed in the past three years but is otherwise compliant, present this history in conjunction with other arguments to the IRS for penalty abatement. If the client has multiple years of penalties, request an FTA for the first year if the prior three years have a clean compliance history. Present other arguments, such as reasonable cause, for subsequent years.

Practitioners should be aware that the IRS uses decision-support software called the Reasonable Cause Assistant (RCA) that has been found to often incorrectly determine FTA eligibility. IRS employees can, however, override the RCA. Be prepared by researching the client’s clean compliance history and applying the qualification rules. If the client qualifies but the IRS representative says the client does not, ask the representative to override the RCA determination. If the representative will not override it, ask for his or her manager. If all other means have been exhausted, consider contacting the Taxpayer Advocate Service (TAS) for help.

Editor’s note: This article is condensed and adapted from “Using the First-Time Penalty Abatement Waiver” in the July 2013 issue of The Tax Adviser.

By Jim Buttonow, CPA/CITP (jbuttonow@beyond415.com), vice president of product development for Beyond415 in Greensboro, N.C., and a former IRS large-case team audit coordinator.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.