If you have not filed your personal income tax form (1040), generally, you should get the tax form filed ASAP without consideration for the yet to be assessed penalties.

Then exercise patience.

Wait for the IRS to assess the penalty and then send a reasonable cause explanation to the address indicated on the notice from the IRS. This way you mitigate all sorts of procedural kerfuffles.

If you already filed your income tax forms, paid the tax and the penalties use IRS Form 843, Claim for Refund and Request for Abatement and attach a cover letter requesting penalty abatement relief and simultaneously a refund.

You can also request the IRS abate a penalty by telephone. Generally, it is only effective for administrative waivers, such as the first-time abatement. If the IRS representative rejects the request, you can provide a more in-depth request by the mail.

There are six elements of a perfect penalty abatement scenario. Be sure to reflect on and memorialize responses to each of these questions as part of formulating a request.

1. Isolated incident. Was the noncompliance a one-time incident?
2. Voluntary correction. Did you find the error and self-correct it?
3. Future compliance. Are you committed to being compliant going forward?
4. Timely correction. Did you fix the noncompliance soon after finding it?
5. Life affected. Was you life or finances affected?
6. Reasonable cause. Was there a good reason for noncompliance outside of your control?

Statutorily the IRC can provide for an exception to the assessed penalty. 

Here’s how that generally breaks down.

1. Section 6404(f) contains a provision for the abatement of penalty that is attributable to erroneous advice the IRS furnished to the taxpayer in writing.  This doesn’t happen often but when it does – get on your high horse and ride!
2. Section 6654(e): estimated tax penalties. The exceptions to the penalty are:
   1. Your tax liability for the current year is less than $1,000.
   2. You had no tax liability in the prior year.
   3. You experienced a casualty, disaster, or unusual circumstance where it is determined that the imposition of penalties would be against good conscience.
   4. You are a newly retired or disabled individual, believe it or not.
3. Section 6724(a) and (c): To obtain a penalty waiver based on reasonable cause, you must submit a written statement, signed under penalties of perjury, which provides the specific provision under which the you are requesting the waiver, and the facts forming the basis for reasonable cause.
4. Section 7502(a): Timely mailing treated as timely filing and paying. The postmark date rule set forth by §7502(a)(1) provides that when a return is properly delivered after its due date by U.S. mail to its proper recipient, the postmark date is treated as the delivery date.
5. Section 7508: If you are serving in a combat zone or participating in a contingency operation, the IRS can abate the penalty for the length of any extension period granted for filing income tax returns and paying income tax.
6. Section 7508A: If you live in an area declared a disaster area by the President or an area affected by a terrorist attack, the IRS can abate the penalty for the length of any extension period granted for filing income tax returns and paying income tax.

Although §6404(f) is only for written advice, the IRS has extended this relief to include erroneous oral advice when appropriate.

Administrative Waivers

According to IRM 20.1.1.3.3.2, administrative waivers consist of the IRS formally interpreting or clarifying a provision to provide administrative relief from a penalty that they otherwise would be assessed.

The IRS may address it in a public statement, news release, or formal communication.

An administrative waiver may be necessary when there is a delay by the IRS in printing or mailing forms, publishing guidance. or really for other reasons leading to what I like to refer to as many ‘types’ of administrative waivers, including:

First-Time Abatement

The purpose for granting the first-time abatement according to the IRS is to reward past tax compliance and promote future tax compliance.  In other words – PR fluff.

The first-time abatement penalty waiver has been around for more than a decade; however, it seems as though most taxpayers do NOT necessarily know about this waiver much less how it works.

Currently there is an administrative waiver in place for the abatement of first-time failure to pay (FTP), failure to file (FTF), and failure to deposit (FTD) penalties. This is widely commonly referred to as the first-time penalty abatement relief waiver.

According to IRM 20.1.1.3.6.1, the first-time abatement provides relief from FTF penalties under §6651(a)(1), §6698, and §6699, FTP penalties under §6651(a)(2) and (3), and/or failure to deposit penalties under §6656.

3 Fun facts:

1. Currently, there is no limit on the dollar $$ amount of penalties this administrative waiver can indeed waive.
2. The IRS uses decision-support software called the Reasonable Cause Assistant to help determine if a taxpayer is eligible for the first-time abatement waiver.
3. This software has been proven inaccurate and you should challenge any disagreeable conclusion from the software.

The IRS routinely failed to inform approximately 1.5 million taxpayers that they qualified for first-time abatement relief from penalties totaling close to $181 million.

There is opportunity here to bring value to most any US Taxpayer who has fallen behind!

In order to qualify for first time penalty abatement relief, you must meet the following requirements.

1. You have not previously been required to file a tax return or have no prior liabilities for the preceding three years of tax returns.
2. You have filed, or filed a valid extension for all currently required returns and paid, and/or arranged to pay, any tax due.
3. You do not have significant penalties assessed in the prior three years on the same type of tax return. Estimated tax penalties do not disqualify you from this relief.

The relief can apply to only one tax period.

If you request penalty relief for more than one tax period and the earlier tax period meets the other requirements, the ‘first time’ penalty relief applies only to that earlier tax year.

You are not disqualified from the first-time penalty abatement waiver even if:

1. The IRS assessed a penalty more than three years prior to the tax return for which the taxpayer is requesting relief.
2. The IRS relieved a penalty under a reasonable cause claim at any time in the past.
3. The IRS gave relief under the first-time abatement waiver more than three years prior to the tax return for which are requesting relief.
4. Penalties exist for the tax return subsequent to the tax return, which you are requesting relief.

The first-time abatement applies to failure to file and pay penalties on all returns except:

1. Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
2. Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
3. Form 1120, Corporate Income Tax Return

First Time Abatement DOES INDEED APPLY to IRS Form 1120S, U.S. Income Tax Return for an S Corporation, but not if the S corporation filed at least one Form 1120S late in the prior three years.

There are five steps to you can follow to successfully obtain first-time abatement.

1. Identify the first year of the penalties. If you have multiple years of penalties, the first-time abatement applies only to the first year.

2. Understand and/or research compliance history. Once you have identified the first year of penalties, you must look holistically at all prior tax filings, penalty assessments, and penalty abatement requests.

3. Confirm first-time abatement applies. Once you have obtained your IRS compliance history by reviewing your transcripts, you must:

• first determine if you had any significant penalties in the three years preceding the year for which requesting first-time abatement.
• Second, you must determine if there are any outstanding or overdue tax returns for the past three years.
• Third, you must determine if the IRS has abated any penalties for the three years preceding the year for which requesting first-time abatement.
• Remember, first-time abatement applies only to a single tax year and the IRS can grant it only once every three years.
• If the IRS is considering a request for penalty relief for two or more tax years and the earliest tax year meets the requirements for first-time abatement, this relief applies only to the earliest tax year.
• You must prove another reasonable cause for subsequent tax years.

4. You can request relief under the first-time abatement waiver in two ways.

• Before the IRS assesses a penalty, file a penalty statement with a paper tax return to request that the IRS not assess the penalty.
• After the IRS assesses a penalty, a taxpayer can request relief by sending a letter to the IRS office where he or she is required to file paper tax returns, or by calling the IRS.

5. After you have paid the penalty, you can use Form 843 to request a refund of that penalty payment. Take care to confirm the IRS abated the penalty by pulling and reviewing your Account Transcripts.

If the IRS approves the first-time abatement request, you will receive either Letter 3502C, 3503C, or 168C (or its equivalent) in the mail. Usually the letter arrives about four weeks after the IRS grants the first-time abatement.

Correction Of IRS Error

The IRS can make errors in computing and assessing tax that directly results in an incorrect penalty amount. They can also make errors in crediting accounts or not posting an extension to file into their system.

Whatever the IRS error, the taxpayer can request abatement of the erroneous penalty calculation resulting from such an error.

Penalty Abatement Process

In order to properly draft a request for penalty abatement, you should follow four steps.

1. Determine if the penalty applies.
2. Select penalty abatement option(s).
3. Request penalty abatement.
4. Follow up and appeal.

Application Of Penalty

You must research your IRS account transcripts to:

1. Identify the penalty(ies) assessed and the amount of each penalty.
2. Understand the taxpayer’s compliance history.
3. Evaluate the three prior years for clean compliance history.

Final Thoughts And Tips

• Except for a CP2000, an IRS manager must approve accuracy-related penalties.
• Consider requesting the manager’s written penalty approval document to see how the manager signed off and determined that the taxpayer’s facts and circumstances supported the accuracy-related penalty.
• You are entitled to request these documents under the Freedom of Information Act (FOIA) (IRM 20.1.1.2.3).
• The appropriate penalty abatement option depends on the facts and circumstances surrounding the taxpayer’s scenario.
• There are six elements of a perfect penalty abatement scenario.
  1. Isolated incident. Was the noncompliance a one-time incident?
  2. Voluntary correction. Did the taxpayer find the error and self-correct it?
  3. Future compliance. Will the taxpayer be compliant going forward?
  4. Timely correction. Did the taxpayer fix the noncompliance soon after finding it?
  5. Life affected. Was the taxpayer’s life or finances affected?
  6. Reasonable cause. Was there a good reason for noncompliance outside of the taxpayer’s control?

If you do not have each of the six elements of penalty abatement you can still get penalties abated by drafting a well written request.

The secret to drafting a well-written penalty abatement request is in developing the facts based on the favorable elements of penalty abatement abatement process addressed herein.

Have a question? Contact John Dundon.

Your comments are always welcome!