There are certain things in life that are easy to understand, and many more things in life that are easier to understand than taxes and the IRS. Even those fluent in legal jargon can find discerning their language difficult. Luckily for you, it is our job and one that we relish in our day-to-day efforts to assist clients in figuring out what they need to know and how exactly they should proceed to solve their tax issues.
In doing what we do best—that is figuring out the best ways to jump through the hoops of the IRS to help taxpayers—we found a loophole of sorts that can result in avoiding an IRS penalty for failing to file a tax return, pay on time, or deposit taxes when they are due.
The failure to pay penalty is sneaky in that it can grow to be a large fine, e.g., 25%, relatively quickly. Until the tax owed is paid in full, it will continue to accrue, with interest being charged on the penalty as well.
Now, most taxpayers probably believe they pay more than their share of taxes already. So why not avoid the penalty if you can?
A little-known way to get relief from specific late-payment and late-filing penalties is through an administrative waiver from the IRS called “first-time abatement”. Although this waiver has been available to taxpayers since 2001, it is largely unknown to most taxpayers and their tax preparers. In fact, a 2012 report by the Treasury Inspector General showed that only 8% of those who qualified for first-time abatement actually requested relief. If you have a good history with IRS compliance, this relief will likely be a viable option to get the penalty waived. First-time abatement is primarily used to remove the failure to pay (under IRC 6651(a)(2) and/or IRC 6651(a)(3)), failure to file (under IRC 6651(a)(1), IRC 6698(a)(1), or IRC 6699(a)(1)), or failure to deposit (under IRC 6656) penalties for both individuals and businesses. However, first-time abatement can also help employers with payroll-deposit obligations as well.
At this point, you may be asking how first-time abatement works and if you qualify. First-time abatement essentially reduces or removes the penalty for late filing or payment and the interest on the penalty that has accrued on it. The first thing to note for qualification is that the taxpayer must have a clean compliance history of at least three years. This means that if you were looking to use first-time abatement to avoid penalties for 2021, you would need to have had no penalties for the years of 2018, 2019, and 2020. Eligibility for first-time abatement also requires one to have filed all required tax returns timely. Another requirement is that a taxpayer that owes back taxes must have arranged to pay the back taxes via an installment agreement or have attained an IRS status known as “currently not collectible”. If a taxpayer has filed an extension to file his or her tax return, that return must be filed timely. It is important to note that first-time abatement can only be used for a single tax period.
If these conditions apply, it is worth moving forward with your request for first-time abatement. There are three ways in which relief can be requested. The first is before the penalty is assessed. In this circumstance, the taxpayer would request that the IRS not automatically assess a penalty through filing a penalty non-assertion request with a paper return. The second route is after the penalty has been assessed but before payment. The fastest way to accomplish this way is by requesting penalty abatement by telephone. It is in the best interest of the taxpayer to have a tax practitioner, tax attorney, or CPA handle this matter, as the general public has a much harder time getting through to the IRS than tax professionals do on the Tax Practitioner’s Hotline. During this call, the IRS agent should be able to look at the taxpayer’s account, determine eligibility for first-time abatement, and apply the waiver while on the phone if the taxpayer qualifies. However, if the penalty amount is too high, the IRS may not be able to abate it over the phone. In this case, the tax practitioner, attorney or CPA should write the IRS a letter requesting first-time abatement for their client. In both situations, a power of attorney will be needed for a tax professional to handle the case on their client’s behalf. The third route is after the taxpayer has paid the penalty to the IRS. In this case, the taxpayer would be requesting a refund. This must be done within two years of payment or three years of the return due date or filing date and can be done using IRS Form 843.
One obstacle to getting approval for first-time abatement is the “reasonable cause assistant” that the IRS uses to determine eligibility for first-time abatement. This decision-support software has a high error percentage, and it is common for IRS personnel to not go out of their way to correct it. This is where a tax professional’s help can be critical. A good tax attorney, tax practitioner or CPA will typically be persistent in persuading the IRS to look at first-time abatement eligibility and arguing for reversal of erroneous initial determinations. Insofar as tax cases go, the quote “you miss 100% of the shots you don’t take,” comes to mind. Although every client’s tax matter or issue is different, one cannot get penalty relief without asking. Since first-time abatement can save taxpayers thousands of dollars on penalty relief, it’s a shot worth taking in our humble opinion.