Did you know that the IRS will give you a First Time Abatement of a penalty? What this means is if you are assessed a penalty on your tax return, there is an easy way to get out of it.
This wonderful tool is called, drum roll, the First Time Abatement, or FTA and is statutory (in the IRS code). This means, if you qualify you get the penalty tossed out. All you have to do is ask.
Depending on the type of penalty and when it was assessed, if you qualify you can save thousands. Let’s take a good look at how I use it and how you would qualify.
Let’s talk about the IRS Penalty Maze
The IRS can imposes a penalty on just about anything tax related. Generally the penalty is based on the tax liability (but not always). They have late filing, late payment, underpayment, under-reporting and substantial under-reporting penalties.
They will charge a partnership by the number of partners if the return was filed late.
If you forget to take a required minimum distribution from your IRA, they charge you on the amount you should have withdrawn EVERY YEAR until you correct the non distribution (i.e. take the money out).
And as a further slap in the face, they charge you interest on your penalty and then again on the added interest. No joke. They can calculate interest daily. Each day adds to the balance, so you are essentially paying interest on the penalty that caused more interest to get charged.
See. A freaking maze. With eight types of penalties in their quiver.
The IRS Throws you a Penalty Sized Bone. The First Time Abatement Program
The FTA gives relief by waiving certain tax related penalties, provided you qualify.
Penalties that can be waived are:
- Failure to File penalty – You filed your tax return late.
- Failure to Pay penalty – You didn’t pay your taxes before the deadline.
- Failure to Deposit penalty – You didn’t make your tax deposits by their due date.
Failure to file penalty waivers are for Individual, partnership and S Corporation returns.
Failure to pay abatement is also limited to the amount shoul, but not paid by the return due date; or tax that wasn’t on the return but was later assessed by the IRS and NOT paid by the due date on the notice.
Qualifying is straight forward. To qualify:
- Timely file the same tax return for the three years prior to the year you are requesting abatement.
- Didn’t receive any penalties during those three years, or have a penalty abated by the FTA.
- If you are self-employed and required to make periodic deposits, be they estimated tax payments or payroll deposits, you can still be granted FTA is you have no more than four waived failure to deposit penalties.
How To Apply for Penalty Relief with the First Time Abatement
- The first way is to read the notice the IRS sent. Some notices have instructions on how to have the specific penalty you have been assessed on the letter abated.
- Give the IRS a call. I’ve gotton most of my penalty abatements over the phone. Once again, check your notice. The appropriate number you need to call will be in the upper right hand corner.
- Write a letter (here’s a template) and send to the address on the notice.
- Form 843, Claim for Refund and Request for Abatement can also be used. Since it is used for several purposes, it might seem confusing. This would be your last option.
You won’t have to specifically ask for First Time Abatement as they are supposed to review your account first to assess whether you would qualify for FTA. If you don’t qualify, you may qualify using an Administrative Waiver, or having a Reasonable Cause.
Make That Interest Disappear Too!
Even though the First Time Abatement helps remove penalties, it doesn’t directly address interest charges, indirectly it reduces interest by removing an amount that would usually have an interest charged against it.
No penalty, nothing to charge interest on. The gift that gives a little more than expected. Not bad IRS.
Success Stories?
I won’t insult your intelligence with some BS made up story about how John Q Taxpayer avoided $25,000 in penalties using the FTA. In all honesty, abatements that large are highly unusual. For someone to have a $25k penalty abatement, at a minimum they owed $100,000 pre-penalty (the max late filing penalty would be 25% of the tax liability).
But the above scenario is more than possible. Maybe you know you owe a bunch and are doing nothing more than avoiding the pain. But you’ve inflicted a lot more pain by being avoidant.
This should be the first tool used when a tax problem appears. If you qualify, you can’t be denied. That’s a success in itself.
You Need to MAINTAIN Tax Compliance Now
Part of qualifying is having a perfect tax record for the prior three years. You can’t use the FTA for another three years.
But that’s not my point. Maintaining a clean tax record takes a little organization. And it’s an area you must develop unless you want to be back in this position (or worse) next year or the year after.
In my career, I have noticed that people who have tax issues tend to have them for a great part of their life. It’s not usual for me to have to help clients deal with multiple tax years, multiple times. You need to make a concerted effort to make sure htat isn’t you.
Conclusion: FTA is a No Brainer and you Don’t Need to Hire Me!
I think the First Time Abatement for penalty reduction is underutilized. Most taxpayers (i.e. not tax geeks like me. You know. Normal people.) are aware of the premise of an Offer in Compromise. They understand there is a way to get their tax debt reduced.
They know they can make payments over time using an Installment Agreement.
I’ve even had people come through my doors asking if I can help get them on Currently Not Collectible status.
But no one seems to know about the easiest and most automatic relief available. If you qualify, there is a letter (here’s a template) you send in and the IRS approves you. If you don’t qualify for FTA, you can still apply for a waiver based on an Administrative Waiver or a Reasonable Cause.
The FTA isn’t going to be life changing, but every dollar saved matters. Plus, it gives you some of your lost power back. Nothing is worse than the feeling of financial stress (been there, hate that I’ve done that). I hope my articles can help you get your power back.
That’s it for now. Hit me up in the comments if you have questions.
Stay cool.
JKC