What is an IRS First-Time Penalty Abatement Waiver?
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Summary:
A first-time penalty abatement is an IRS policy that allows certain taxpayers to have their tax penalties waived. However, abatement is only available in select situations and is generally only granted to a small number of taxpayers each year.
The tax code in the United States can be confusing. Unfortunately, this leads to penalties taxpayers incur for filing or paying their taxes after the filing date. And depending on how much you owe, those penalties can add up to hundreds — or even thousands — of dollars.
Luckily, the IRS has a couple of policies in place that allow taxpayers to receive penalty relief. These are especially helpful if the taxpayer has a good reason for filing or paying late or previously paid their taxes on time. One of those policies is first-time penalty abatement, designed to grant penalty relief to taxpayers with otherwise clean tax records.
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What is a first-time penalty abatement?
First-time penalty abatement (FTA) is an IRS policy that offers relief to taxpayers for certain financial penalties they’ve accrued. This FTA waiver benefits taxpayers who have a history of paying their taxes on time but have acquired certain penalties.
Despite the availability of the IRS first-time penalty abatement administrative waiver, the program isn’t commonly used. In 2020, for example, only 11.3% of failure-to-file and 10.4% of failure-to-pay were abated.
What does abatement of penalties mean?
Abatement essentially means forgiveness. If the IRS abates your penalties, it means they’ve waived them and you won’t have to pay them.
Which penalties does first-time penalty abatement cover?
The IRS first time penalty abatement applies to financial penalties commonly charged to both individuals and businesses. The most common penalties covered by the policy are the failure-to-file and failure-to-pay penalties.
Failure-to-file penalty
This penalty applies to taxpayers who owe money in taxes and failed to file their returns by the due date. This penalty is 5% of the taxes for each month they are unpaid, with a maximum penalty of 25%.
However, for returns that are over 60 days late, the penalty is $435 or 100% of the unpaid taxes, whichever is lower. This penalty doesn’t apply to taxpayers who don’t owe anything in taxes or those who will receive a tax refund.
Failure-to-pay penalty
In addition to the penalty for failing to file your income tax return, the IRS also imposes a penalty for failing to pay. Regardless of whether you file an extension for your tax return, your tax bill is still due in mid-April. This penalty is 0.5% of the taxes for each month you don’t file your taxes, with a maximum penalty amount of 25%.
If you can’t pay your full tax bill at once, you can set up an installment agreement with the IRS. However, you’ll still pay a penalty on the unpaid amount. If you fail to pay your tax bill on time, the IRS will also charge interest on the unpaid amount. On the other hand, if you receive an FTA waiver, it will also apply to interest that has accrued.
Finally, it’s important to note that penalty abatement can never apply to your unpaid taxes due. Regardless of why you’re requesting to have your penalties waived, you’ll still be on the hook for paying your tax bill. Abatement simply eliminates the IRS penalties you accrued for failing to file your income tax return or failing to pay your taxes on time.
As you can see from the graph above, the average rate of cases where penalty was abated is around 12.6% (without the 2008 data point). There seems to have been an anomaly in 2008, which is maybe a typo in the IRS data.Pro Tip
If you have arranged to pay your tax bill but haven’t paid it yet, you’ll continue to accrue interest and late filing penalties. If you have outstanding taxes, you may want to wait to request penalty abatement until you’ve fully paid your bill. This way you can have the full estimated tax penalty and interest amount abated.
Individual vs. business abatements
Failure-to-file and failure-to-pay penalties, along with the accrued interest, are the only penalties that can be waived for individuals. However, businesses can also file an abatement for a failure-to-deposit penalty.
These penalties are charged when employers fail to deposit employment taxes on time, in the correct amount, or in the correct way. This penalty can apply to a failure to deposit income taxes, Social Security taxes, Medicare taxes, and federal unemployment taxes.
How to qualify for first-time penalty abatement
Not everyone that has been charged IRS penalties will qualify for abatement. The program is designed to help taxpayers with a previously clean penalty history, so taxpayers must meet certain requirements before applying. There are three basic criteria for first-time penalty abatement:
- Clean penalty history. During the past three years before receiving a penalty, you either didn’t have to file a return or you’ve had no penalties during those tax years.
- Filing compliance. You’ve filed all of your currently required tax returns or have filed a valid extension.
- Payment compliance. You have paid, or have arranged to pay, any taxes that are due.
As we mentioned, only a small percentage of IRS penalties are approved for penalty abatements each year. To receive an FTA waiver, you must actually request penalty abatement from the IRS. If you’ve been charged penalties and have a previously clean compliance history, it’s worth requesting abatement to see if you can get penalty relief.
Qualified vs. unqualified tax return forms
To qualify for first-time penalty abatement, you must also have filed with an applicable tax form. Check the list below to see if your form qualifies for a potential abatement.
It’s also important to remember that first-time penalty abatement can only apply to one tax year.
For example, let’s say you had two years in a row where you accrued IRS penalties for failing to file or pay your taxes on time. However, those tax periods came after a period of at least three years of on-time filing and payments.
The abatement would only apply to one tax year, and it would apply to the earliest tax period. You wouldn’t be eligible for abatement for the second tax year during which you were charged penalties. But, as we’ll talk about later, there may still be a way to have those penalties forgiven by the IRS if you can meet certain other requirements.
How to request first-time penalty abatement
You can submit a penalty abatement request from the IRS through a few different methods:
- Ask your tax representative or practitioner call via the IRS Practitioner Priority Service (PPS) line
- File online using IRS e-services Electronic Account Resolution
- File the request penalty abatement in writing
You may have your tax penalties abated through any of these methods, but it’s often best to try a phone call first. In some cases, IRS employees may agree to remove those penalties immediately, which will give you the quickest resolution. If the IRS agrees to waive your penalties over the phone, you’ll receive a letter of confirmation.
It’s also worth noting that whether you can have your penalties abated over the phone may depend on how much you owe. For large amounts of money, a request online or in writing may be required.
Ultimately, it’s important to remember that first-time penalty abatements are never automatic. If you’ve accrued penalties and think you qualify for abatement, the only way to actually have it granted is to request it from the IRS.
Although you can negotiate directly with the IRS, it can sometimes help to hire a professional tax relief company. If you are just dealing with a modest penalty or a couple thousand dollars in back taxes, you are probably better off doing it yourself. However, if you have substantial tax debt or complex tax returns, consider getting a free consultation with a tax relief professional to see what your options are.
How to appeal a first-time abatement refusal
If the IRS doesn’t grant your first-time penalty abatement when you initially request it, you can choose to file an appeal. If you meet all the requirements and still have your request denied, it’s worth appealing. It gives you the opportunity to share more of your financial situation and to argue your case.
The IRS will generally share why a request was denied, so you know what information to provide in your appeal. You’ll have 60 days to appeal a decision, after which you’ll lose your right to appeal.
If you appeal your request and provide new relevant information that shows you meet the criteria, the IRS should abate your penalties. But if the new information you provide doesn’t show that you meet the criteria of abatement, then you’ll likely have your request denied again.
Pro Tip
If you’ve had your FTA request denied and are filing an appeal, consider hiring a tax professional. They can help you ensure you’ve included all relevant information to show you meet the criteria, and may help reduce your chances of a second rejection.
Can I get my penalties waived without a first-time penalty abatement?
Unfortunately, not every situation is eligible for first-time penalty abatement through the IRS. If you haven’t met the three criteria for penalty abatement, or you have more than one tax year that you need abatement for, then you’ll be stuck paying certain penalties. Luckily, there’s another way to avoid fees on failure-to-file or failure-to-pay penalties.
In addition to penalty abatement, the IRS allows taxpayers to seek penalty relief due to reasonable cause. In this case, you must show the IRS that you had reasonable cause not to file or pay your taxes on time. Some situations that may meet reasonable cause criteria include:
- A fire, natural disaster, casualty, or another disturbance
- An inability to obtain records
- Death, serious unless, incapacitation, or another unavoidable absence of the taxpayer or a member of their immediate family
To have your penalties waived for reasonable cause, you’ll have to provide documentation to provide the situation that prevented you from filing or paying your taxes. You’ll have to show what happened, when it happened, how it affected your life, and why it prevented you from filing or paying your taxes on time. Relevant documents to provide may include hospital or court records, documentation of natural disasters, and any other documentation to provide context to the IRS.
Key Takeaways
- First-time abatement penalty waivers allow qualified taxpayers to apply for their tax penalties to be waived after failing to file or pay their taxes.
- To qualify for first-time penalty abatement, you must meet certain criteria, including having filed and paid your taxes on time for the three previous tax years.
- You can request first-time penalty abatement either over the phone, online, or via writing, and have the opportunity to appeal the decision if your abatement is denied.
- If you don’t qualify for first-time penalty abatement, you may still have your penalties waived through the IRS reasonable cause exemption.
EG
Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.
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