When the IRS removes penalties on your tax debt, that is termed as first-time penalty abatement (FTA). Penalties arising from failure to pay, to file, and to deposit. Interest related to these penalties may also be removed.
The FTA is concerned with the following:
| Failure-to-file | If you fail to file or file late | Penalty is 5% of your balance per month |
| Failure-to-pay (penalties related to an audit, but not accuracy-related penalties, may be addressed) | If no payment was remitted | Penalty is 0.5% of your outstanding tax debt per month |
| Failure-to-deposit (941s) | If you didn’t deposit on time for payroll taxes or an incorrect amount was submitted | Penalties can be erased if subsequently corrected |
What are the three basic criteria to qualify for a First Time Penalty Abatement?
- For the past three tax years, no penalties (above $100) were incurred. In case you were penalized for underpaying the previous years, these penalties are not taken into account by the IRS.
- All required returns or extensions were properly filed. Any outstanding paperwork will disqualify you. Please make sure your submitted documents to the IRS are complete and in good order.
- For your outstanding debt, payment arrangements were made. Make sure your tax debt was paid in full or another payment arrangement is in effect. Regular tax payments are promptly remitted and this arrangement is properly followed.
Where can I apply for a First Time Penalty Abatement?
Go online, write a letter, or contact the IRS by phone. If you are found to be qualified, the IRS may address your concerns right then and there. Other times, once the tax debt has been settled, the IRS will acquiesce to removing the penalties.
If your request needs more time for processing, the penalties will continue to grow. But as long as you qualify for the abatement, these penalties will be taken out when the approval comes in.
What is the amount that can be abated?
The abatement is for penalties incurred in the first year and probably not more than $10,000.
If your tax penalties are more than a year old, the IRS needs “reasonable cause” to issue a removal. There may have been circumstances or situations beyond your control, but the IRS needs to see that you made the effort to pay, but unfortunately fell short.
Your records may have been destroyed by natural disasters like flood or fire. Due to a lack or records, there was an inability to calculate the amount owed. Maybe you were undergoing rehab or serving a prison sentence. Or you were held against your will here or abroad. There was a death in the family that greatly affected you. There was a mail or transport strike that prevented you from remitting the payment. A tax professional or an IRS rep gave you bad advice and info.
These are just some examples of a “reasonable cause” wherein that particular situation stopped you from fulfilling your obligation. The IRS will take this into consideration to see if a penalty abatement can be granted. Monitor your penalties or this will continue to pile up if you don’t address it straight away.