The Internal Revenue Service may provide a waiver from a penalty and potentially save you a significant amount of money through its first-time penalty abatement waiver, also known as the FTA program.
If you incurred penalties, you may qualify. However, this program is not for repeat offenders.
The FTA program is an administrative waiver allowing the IRS to forgive individuals and businesses from:
< Failure to file (the penalty is 5 percent per month).
< Failure to pay (the failure-to-file and failure-to-pay penalty will continue to accrue, so the FTA should not be used until the tax return is filed and paid in full).
< Failure to deposit (regarding payroll taxes).
< Penalties related to an audit, to name a few, but not to accuracy-related penalties such as mathematical errors.
You also must meet other criteria before you can seek abatement under this program, including:
< You didn’t previously have to file a return.
< You have had no penalties for the three prior years.
< You filed all currently required returns or filed an extension of time to file.
< You are current or on a payment agreement with the IRS.
If you meet these criteria, you can request an abatement of your penalty. To make this request, you can contact the IRS by telephone, e-services or in writing.
If you make this request by telephone, you should contact the IRS at the number listed on the letter assessing your tax and penalty. You also can find the contact numbers at IRS.gov.
If you owe below a certain amount of penalty, you could have the abatement granted to you over the phone.
However, if the penalties are considered too significant, an IRS phone representative will tell you to contact the agency in writing.
IRS representatives use a decision-support software tool called the Reasonable Cause Assistant to help determine whether a taxpayer is eligible for an FTA.
In other words, the IRS uses artificial intelligence to determine whether to reduce a penalty.
Rather than pay the penalty, you could hire a tax professional to help.
Tax professionals should understand the first-time penalty abatement program and can file a request on your behalf.
To allow a tax professional to file the necessary forms, use IRS Form 2848 Power of Attorney and Declaration of Representative.
This form allows your tax professional to request an abatement on your behalf.
Practitioners can call the IRS practitioner priority service line. IRS accounts management representatives have the authority to grant FTAs.
When requesting an FTA, it is good to provide other penalty relief arguments, including reasonable cause, to increase the chances of success.
You also can get an abatement and refund of penalties already paid. If you already paid the penalties but would like them abated and refunded, you can fill out and submit the IRS Form 843: Claim for Refund and Request for Abatement.
REASONABLE CAUSE EXCEPTION
If you do not qualify for the FTA program, all penalties have provisions for abatement for a reasonable cause exception.
The reasonable cause exception generally does not include lack of funds.
You may, however, be unable to pay your taxes, but this reason alone will not qualify for penalty abatement.
The IRS has a bit more leeway when it comes to the abatement of penalties than it does with interest.
The IRS threshold for what constitutes reasonable cause is a higher bar – it would generally require the hospitalization of a taxpayer or a member of the immediate family or some kind of disaster.
Once the circumstance that gives rise to a reasonable cause exception has ended, the IRS generally expects the taxpayer to take action to come back into compliance.
John D. Rossi III is a business leader, lecturer, accountant and financial planner with more than 30 years of business and academic experience. An associate professor of accounting at Moravian College in Bethlehem, he is president of JR3 Virtuoso Solutions Inc., specializing in financial reporting, taxation, professional training and consulting services. He can be reached at firstname.lastname@example.org.