Many taxpayers are unaware that they may be eligible for relief from tax penalties under the IRS First Time Penalty Abatement policy. The penalty abatement is available for penalties due to a failure to file, failure to pay taxes, or a failure to deposit taxes.
Requirements for First Time Penalty Abatement
To qualify for First Time Penalty Abatement, you must meet the following requirements:
- You have no tax penalties for the three years previous to the year in which you received a penalty
- You have filed all required returns, or filed for an extension to file
- You have paid, or arranged to pay, any tax due
If you have outstanding returns to file, or need to pay tax or negotiate an installment agreement, the IRS should give you a chance to come into tax compliance before determining whether or not you qualify for First Time Penalty Abatement.
The penalty abatement will only apply for one tax period, so it should be used wisely. If you think that you have reasonable cause for your failure to file or pay then you should first attempt to convince the IRS that it should abate the penalty on that ground. Only if the IRS has determined that you do not have reasonable cause, and you have exhausted all of your appeals should you play your “ace in the hole.” Also if you are going to apply for an offer in compromise it usually doesn’t make sense to request a penalty abatement.
First Time Penalty Abatement in Practice
The IRS uses an automated decision-making tool, called a Reasonable Cause Assistant (RCA) to help make determinations of eligibility for First Time Penalty Abatement. Unfortunately, the RCA is not always correct, and can improperly deny taxpayers from penalty relief.
IRS representatives have the ability override the RCA, but they may not always choose to do so. Also remember that the decision by the IRS not to grant a first time penalty abatement can be appealed. Your tax lawyer can help you present your case, and negotiate with the IRS your behalf.
The IRS does not do a very good job at publicizing the First Time Penalty Abatement, so many taxpayers remain unaware that they are eligible for it. Your tax attorney can help you decide whether to apply for First Time Penalty Abatement or other tax relief programs.