What Exactly is an IRS Penalty Abatement?
When the IRS slaps taxpayers with a penalty for failing to file or failing to pay their federal taxes, there are certain steps a penalized party can take to resolve their issues. One of these steps is known as “first-time penalty abatement.” What is the first-time penalty abatement program and how can penalized taxpayers take advantage of it?
The First-Time Abatement Waiver
The Internal Revenue Service introduced the first-time penalty abatement waver (FTA) in 2001to help taxpayers deal with federal tax problems. The FTA is obtained by qualified taxpayers for failure-to-file, failure-to-pay or failure-to-deposit penalties. In order to qualify for an FTA waiver, a taxpayer must comply with all federal filing and payment requirements. Taxpayers may only claim an FTA waiver for a single tax period only.
How to Request an FTA
To qualify for a first-time abatement waiver. The penalized party must demonstrate compliance with several requirements. Penalized parties must demonstrate filing and payment compliance, as well as a three-year clean penalty history. To meet these requirements, the taxpayer must have filed – or filed an extension for – all tax returns currently required, as well as not having any outstanding IRS requests for unfilled returns. To meet payment compliance requirements, the taxpayer must have paid – or made arrangements to pay – all due tax. This includes payment plans, provided they are up to date.
Finally, to fulfil the clean penalty history requirement, the person must have no significant penalties assessed in the prior three years. These penalties, which result in the taxpayer not meeting the “clean penalty history” requirement, include:
- Having a penalty assessed more than three tax years prior to the tax return in question
- Having an estimated tax penalty assessed in the past three tax years
- Receiving any reasonable cause relief from tax penalties during the last three tax years
- Having tax penalties in subsequent tax years
- Receiving an FTA more than three years prior to the tax return situation in question; or
- Receiving reasonable cause relief from a tax penalty in the past
What is Reasonable Cause?
When it comes to tax penalties, the IRS is willing to consider any sound reason why a taxpayer failed to file a tax return, make a deposit or even pay any past-due taxes. Simply having a lack of funds is inadequate for claiming an abatement. The major reasons behind the lack of funds, however, may be considered. These circumstances are called “reasonable cause” and include:
- Fire, casualty or natural disasters
- Inability to obtain records
- Death, serious illness, incapacitation, or unavoidable absence by the taxpayer or an immediate family member
- Any other reason which illustrates using all ordinary care and prudence to meet tax burdens
- If taxpayers meet these requirements, they may be able to claim a first-time abatement waiver.
How Is Reasonable Cause Established?
The Internal Revenue Service has certain facts which must be established to determine if a taxpayer meets the requirements for reasonable cause. These are:
- What happened and when?
- What circumstances prevented the taxpayer from filing or paying taxes for the period in question?
- How did the circumstances affect their ability to file or pay?
- Once these facts are established, what steps did they take to file or pay their taxes?
- In the case of Corporation, Estate or Trust, did the affected person or an immediate family member have sole authority to execute the return or make payment?
To prove the above facts, certain documentation is required. These may include, court records, hospital records or a physician’s letter to establish incapacitation or illness. Other relevant documents may be any documentation of events or natural disasters which could have prevented compliance with a taxpayer’s liabilities.
Contact an Attorney
If you are facing penalties from the IRS, you need the help of an experienced tax law firm. At Ayar Law, we represent people and business with state and federal tax problems that require creative solutions. We focus entirely on tax problem resolutions and giving our clients a fresh start. We strive to get you the best solution for your individual situation. So, if you’re having tax troubles call Ayar Law today at (248) 262-3400 for a free, no-obligation consultation