It’s common knowledge that most taxpayers dislike paying their taxes in general, and especially despise paying IRS penalties. While penalties can seem unfair to taxpayers, as tax attorneys we can assure you that the Internal Revenue Service applies penalties to discourage noncompliance, not to generate revenue.
To help reward past tax compliance and continued compliance in the future, the IRS created the first-time tax penalty abatement waiver (FTA) in 2001. This relief waiver allows taxpayers to request an abatement, or removal, of penalties that the IRS assesses against them. This waiver can be applied for certain penalties in a single tax period—one tax year for individual and business income taxes and one quarter for payroll taxes. Essentially, the IRS rewards typically compliant taxpayers with a one-time penalty pardon, which can save those taxpayers hundreds, even thousands, of dollars.
However, according to a 2012 report by the Treasury Inspector General for Tax Administration (TIGTA), despite the obvious advantages of the IRS waiver most taxpayers who qualify for tax penalty abatement never request it. Unfortunately, most taxpayers do not know that the FTA even exists. Additionally, IRS representatives often incorrectly reject FTAs while using the IRS’s defective automated decision tool to determine penalties.
Unfortunately these penalties are usually automatically assessed. However, depending on their situation, taxpayers have three options to request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties:
- Before the IRS automatically assesses penalties, taxpayers can file a penalty non-assertion request with their paper return.
- After the IRS has assessed a penalty, taxpayers can request tax penalty abatement by calling the IRS or writing an abatement letter. Tax professionals can also request abatement using IRS e-services.
- After taxpayers have paid a penalty, they can request a refund using Form 843. The individual must file the claim within two years of the date the penalty was paid, or within three years of the return due date.
If an FTA applies to a taxpayer’s situation, they must still qualify to receive abatement before penalties can be reversed or refunded. To qualify, taxpayers must be able to prove a three-year clean penalty history and overall past compliance in filing and paying their taxes.
Taxpayers may even qualify for an FTA if they have an open installment agreement, as long as installment payments are current. Even if this is not the case, the IRS is required to give a taxpayer who is behind on installment payments the opportunity to comply, and thereby qualify for abatement.
As the IRS focuses on closing the $450 billion annual tax gap, encouraging taxpayer compliance has become a top priority. With some of the recent reports that highlight the inconsistencies of the tax penalty abatement program, the IRS will most likely make future adjustments to its procedures for requesting and granting taxpayers’ penalty abatements.
Since 1997, our tax attorneys have saved our Bay Area clients millions of dollars in taxes, penalties, and interest. Contact Tax Helpers today to see how we can help you obtain tax penalty relief and get your financial future back on track!