Have you heard of the IRS’ First-Time Penalty Abatement (FTA) administrative waiver? Most people have not, and that even includes some tax professionals. This is unfortunate, because the program offers a high potential for saving taxpayers substantial cost in some situations.
The FTA was established in 2001 as a way to reward filers with good tax compliance histories by providing amnesty for the first tax offense (in certain cases). Think of it as a “Get Out of Jail Free” card that taxpayers can use to avoid penalties, once and only once, if the IRS finds they have not complied with requirements to file, pay or deposit taxes.
FTA policy allows taxpayers or tax professionals acting on their behalf to request abatement of penalties either before or after such a penalty has been assessed, or to request a refund of the penalty after payment. The policy is not applicable to estimated taxes, negligence or other accuracy-related penalties; the only penalties eligible for FTA relief are those stemming from:
- Failure to file
- Failure to pay
- Failure to deposit
Business filers may request relief for any of the penalties listed above, while individual taxpayers are limited to the first two options. If granted, FTA waivers offer relief for penalties covering a single tax year, or a single quarter in the case of payroll taxes. Gift tax returns and estate returns are not eligible for the program.
To qualify for FTA relief, taxpayers must meet certain criteria to establish that they have a clean compliance history. This includes filing and paying, or arranging to pay, all taxes due in other years and having no significant penalties assessed within the past three years for the tax year in question. Estimated tax penalties will not preclude a taxpayer from qualifying for an FTA, nor will receiving penalty relief based on reasonable cause.
Since FTA offers such potential to benefit tax filers, why do so few utilize the program? Since few know of it and it’s not well advertised, many who could qualify simply aren’t aware of its existence. Nor are their service providers, who frequently don’t know how to request or use FTA even if they have heard of it. In addition, the IRS employs an automated FTA decision tool that generates a high number of errors when determining penalties. This leads IRS representatives to disallow FTA in cases when it might properly be allowed.
Despite the difficulties, it is not hard to qualify for or use an FTA-based waiver. Tax professionals should carefully establish whether their clients may be able to use the program and then persist in working with the IRS to ensure relief is granted. With hundreds or even thousands of dollars in penalties at stake for a particular client, the potential for FTA relief should not be ignored or carelessly dismissed.
If the IRS notifies you that they are seeking penalties and you have an otherwise good history of tax compliance, be sure your tax professional knows how to request relief through the FTA program and exerts sufficient diligence in pursuing a waiver if you qualify.