There is little-known program within the IRS that’s been around since 2001 called the First Time Abate Policy (FTA) which provides penalty relief in certain situations. It’s a one-time deal for a taxpayer charged with a failure to file or failure to pay or failure to deposit (employer payroll taxes) tax penalty.
In order to qualify, the taxpayer must have filed all tax returns that are due and paid or arranged to pay all tax liabilities. In other words, in order to qualify, you must be current. And you must have a three-year record of being current. This includes taxpayers who have set up installment agreements and are current on those payments.
The penalty relief only applies to one tax period. So if you had neglected to file your 2009 and 2010 income tax returns, you would qualify for penalty abatement for only one of those tax years.
According to the IRS, “Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, United States Gift (and Generation - Skipping Transfer) Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. This list is not all-inclusive.”
This means that for the most part, only individual income tax filers will qualify, but companies who have failed to deposit employee and employer paid payroll taxes may also be eligible.
The late filing penalty is 5% of the unpaid taxes for each month or part of a month that the return is late, up to a maximum of 25%. The failure to pay penalty is 0.5% of the unpaid taxes for each month or part of a month after the due date that the taxes aren’t paid. As you can see, the bill can mount to a cumbersome level.
You must request penalty relief by writing to the IRS service center where you filed your taxes. In the letter, you must mention the First Time Abate program and demonstrate “reasonable cause” for your failure to file or failure to pay. Good examples of reasonable cause include financial hardships like a job loss, business reversals, loss of records, etc. The IRS will base decisions on removing any future failure to file, failure to pay or failure to deposit penalties on any information taxpayers provide that meets reasonable cause criteria.
If you need help, see your tax professional or call the IRS at 800-829-1040 for assistance. Taxpayers may also use IRS Form 843 Request for Abatement.
According to a report from the Treasury General for Tax Administration (TIGTA) last year, approximately 1.45 million taxpayers qualified for relief from penalties totaling close to $181 million under FTA. Taxpayers are unaware of the program and the IRS does not take steps to inform them.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.