The IRS has an administrative waiver that provides penalty relief for certain penalties for taxpayers who have a clean compliance history. This waiver is called the IRS’ first-time abatement or “FTA.” FTA has been around since 2001, but few use it to abate their penalties.
Let me break down the rules for you. For a list of forms that FTA applies, see this blog post.
FTA applies to 3 very common penalties: FTA is primarily directed at three common penalties- failure to pay (“FTP”- 56% of all penalties), failure to file (“FTF” – 12% of all penalties), and the failure to deposit (“FTD”) penalties for employers who remit payroll deposits.
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S corporation and partnership late filing penalties qualify for FTA: yes, those dreaded late filing penalties for the pass-through entities qualify for FTA. You will have to find someone at the IRS who is aware of this rule to be successful in abating late filing S corp or partnership penalties.
Look back 3 years for a clean compliance history: the last three years need to be penalty free, with the exception of the estimated tax penalty. For example, if you have a qualifying penalty in 2018, you cannot have a penalty in 2015-2017 to qualify.
Past estimated tax penalties do not qualify for FTA and do not disqualify you from FTA: if the taxpayer has an estimated tax penalty in the past three years, it will not disqualify the taxpayer from FTA.
If you owe taxes, you can use FTA from any year past 2000: FTA can only be “refunded” for the past three tax years or any penalty paid within the past two years (the IRS refund statute rules). However, if you owe back taxes, you can use FTA from 2001 to the current tax year to be offset against the amount owed. See this blog post for more.
Accuracy penalties do not qualify for FTA: if you are audited or receive a CP2000, you may be assessed a 20% accuracy penalty in addition to the tax owed. Accuracy penalties do not qualify for FTA. However, the IRS provides a get out of jail free card for the accuracy penalty for negligence if it is the first time the taxpayer received a CP2000 notice.
You must be in “good standing” with the IRS: this means all required returns must be filed and, if you owe back taxes, you are in a collection agreement with the IRS.
If you qualify for FTA, the IRS will code a reasonable cause abatement as FTA if it applies: this is a new rule in 2018. If you qualify for penalty abatement for FTF, FTP, or FTD based on reasonable cause (you have reasons outside of your control, like sickness, that caused the noncompliance), the IRS will code your penalty abatement as FTA if the taxpayer has a clean compliance history. This will disqualify any penalty in the next 3 years from qualifying for FTA. In the past, taxpayers could get reasonable cause abatement in Year 1 and use FTA in Year 2. Prior to 2018, the IRS considered penalties abated for reasonable cause in prior years as “clean compliance.”
How do you find out if you qualify?
The easiest method to understand if you qualify and can use FTA is to review your IRS account transcripts. Transcripts will show penalties applied, by year, and you can apply the rules above to check if you qualify.
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