If you recently didn’t pay your taxes and now owe a penalty, you may qualify for some kind of penalty relief. If this is the first year you’ve stumbled, you could be a good candidate for First-Time Penalty Abatement. This article takes a look at what First-Time Penalty Abatement is, who qualifies, how to request it, and what your options are if you don’t qualify.
First-Time Penalty Abatement Overview
First-Time Penalty Abatement (FTA) is a waiver the IRS may grant that eliminates penalties for taxpayers with good tax history. The idea is that the IRS doesn’t want to penalize typically responsible taxpayers who made one mistake, so they offer an easy solution.
FTA may only be requested for the following penalties:
- Failure to Pay
- Failure to Deposit
- Failure to File
Keep in mind, FTA only applies to a single tax year. If you are looking for penalty relief for more than one tax year, FTA will only apply to the earliest tax year. You’ll have to look into other options for subsequent years. That being said, despite being called “first-time” abatement, FTA can actually be used more than once since the IRS only looks at the last three years for recent compliance. Effectively you can use it every four or more years.
Who Qualifies for First-Time Penalty Abatement
There are two requirements you have to meet in order to qualify for FTA. Those requirements are:
- You have at least three years of clean tax history immediately prior to the year you wish to use FTA
- You are currently in compliance
Being in compliance means you have filed all required returns or a valid extension and are paying or are arranging to pay all taxes due.
How to Request First-Time Penalty Abatement
To request First-Time Penalty Abatement, reach out to a tax professional. They will get in contact with the IRS on your behalf either by phone or mail. You will need to grant them Power of Attorney so that they can represent you to the IRS.
If you meet FTA criteria and your penalties get removed over the phone, you will receive a letter within 30 days from the date of the call your tax professional had with the IRS. If you don’t receive a letter within 30 days, your tax professional should follow up with the IRS.
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You may also request penalty abatement yourself by calling the IRS help line or the phone number on the notice you received, but a tax professional will be able to provide advice and help you navigate your options.
Your Other Options
If you don’t qualify for First-Time Penalty Abatement, you still may qualify for other penalty relief options such as reasonable cause or filing an appeal. It’s worth noting that the first thing you should always do is check to see if the penalty assessed is correct. If the information included in the notice of penalty you received is incorrect, you may not owe a penalty at all.
Reasonable Cause
If you’re looking for penalty relief for more than one tax year, you may qualify for penalty relief under reasonable cause criteria. Reasonable cause is based on “all the facts and circumstances in your situation.” The IRS will consider situations where a taxpayer tried to meet their Federal tax obligations but were unable to do so. Situations that fall under reasonable cause include:
- Fire, casualty, natural disaster or other disturbances
- Inability to obtain records
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
There could be other reasons that qualify (if established), including a lack of funds (for the failure-to-pay penalty).
There are facts the IRS will need in order to determine reasonable cause. According to the IRS, those facts are:
- What happened and when did it happen?
- What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/ or pay your taxes timely?
- How did the facts and circumstances affect your ability to file and/ or pay your taxes or perform your other day-to-day responsibilities?
- Once the facts and circumstances changed, what actions did you take to file and/ or pay your taxes?
- In the case of a Corporation, Estate, or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?
You may need to provide hospital records, court records, or other documentation that supports the reasonable cause justification.
An Appeal
If you are not granted First-Time Penalty Abatement, you may be able to take the case to Appeals. Your tax professional may be able to help you put together an Appeals case, so be sure to contact them as soon as possible.