In 2001 the IRS instituted the First-time Penalty Abatement (FTA) to bolster voluntary compliance and help to fairly administer the application of penalties.
But according to a 2012 Treasury Inspector General for Tax Administration report, in 2010 only 8.8% of the taxpayers in the sample it tested actually received the abatement. The report indicates that the primary reason for this disparity is that most taxpayers and tax professionals do not know FTA exists. This is largely because the IRS does not indicate FTA as an option on its penalty-related notices. This is likely a strategic move. If the IRS publicized FTA, they would be inundated with requests.
With sufficient knowledge of the FTA process and a phone call to the IRS, individuals and tax professionals can often reduce or eliminate penalty assessments.
The most complex part of requesting FTA is determining whether you qualify. FTA applies only to certain penalties and certain returns filed.
- For individuals, FTA applies to the failure-to-file and failure-to-pay penalties. Estate and gift tax returns do not qualify for FTA waivers.
- For businesses and payroll clients, FTA applies to the failure-to-file, failure-to-pay, and/or the failure-to-deposit penalties. S corporation and partnership late-filing penalties also qualify under FTA.
For individual and business clients, FTA does not apply to the estimated tax and accuracy-related penalties. The assertion of an accuracy-related penalty is based on the facts and circumstances of each taxpayer and each tax year.
To qualify for FTA, you must meet the clean compliance criteria rules:
- Clean three-year penalty history - You cannot have penalties of a “significant” amount assessed in the prior three years on the same type of tax return. IRS procedures do not publicly define significant amount, but in practice, the IRS has used any penalty amount as significant in its application of the FTA qualification.
- Required returns filed - You must have filed all tax returns for the past three years, as required.
Keep in mind that there is an unpublished ceiling on the penalty amount that the IRS will abate under FTA by phone. If your penalties are substantial, you can request FTA in writing.