What is a Penalty Abatement

Afshin 
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چهارشنبه 17 فروردين 1401 زمان : 22:13 


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A penalty abatement, at its most basic, is when the IRS eliminates penalties that were assessed against you. The IRS can assess penalties for many reasons. However, the most common are failure to pay, late filing, and accuracy. Even if they have been granted a penalty abatement, taxpayers are still responsible for any unpaid taxes.

Taxpayers are not automatically issued abatements by the IRS. It is necessary to request one. The IRS is not likely to reduce penalties. Recent statistics show that about 11% of tax penalty penalties are reduced. The IRS does not consider fairness or the ability of the taxpayer to pay the tax, penalty, interest, or tax due.

The IRS charges interest for any penalties it assesses. Getting your penalty reduced will also eliminate interest.

What are the requirements to be eligible for a Penalty Abatement?

The IRS states that you could be eligible for penalty relief if your compliance with tax laws is not possible due to circumstances beyond your control. The IRS states that the majority of penalties abatement grants fall into four categories.

Don't rely on incorrect IRS advice
There are statutory and regulatory exceptions to the tax law penalty
Administrative waiver to assist tax administration, including hardship failure to pay penalty relief and penalty abatement for the first time
Reasonable cause

Taxpayers who have not had any previous compliance problems can get a first-time penalty abatement.

These qualifications are also required:

There were no penalties for any tax years before the year in which you received the penalty, or weren't required to file a tax return.
You have filed all required returns.
You have either paid or arranged for the payment of tax.

Reasonable Causes for Penalty Reduction

The IRS will grant a reasonable cause penalty abatement to most taxpayers who don't file for first-time penalty abatement. When deciding whether you are eligible to receive a reasonable cause reduction, the IRS will first consider whether you acted in good faith. The IRS will also consider whether you tried to accurately report your tax liability, but failed due to unforeseeable circumstances beyond its control.

Reasonable Cause Examples

The IRS accepts the following reasonable causes:

Relying on the advice of a tax professional is reasonable
Ignorance of tax laws
Medical illness
Financial hardships that can be severe
Death in the family
Natural disasters
Destruction of records
Incarceration

Keep in mind that the IRS will often require documentation to support your claim for a reasonable reason for penalty abatement.

How do I file a Penalty Abatement request?

You can call the IRS to request penalty abatement for the first time if you are interested in pursuing it. You may need to contact the local IRS office if your case is being handled by them. The IRS will mail a letter stating that the penalties have been removed if your request for a phone abatement is granted.

Other types of IRS penalty abatement such as reasonable cause abatements are not often granted by the IRS over the telephone. Therefore, it is important to request them in writing. You can also use Form 843 to request a penalty reduction for reasonable cause or an IRS error.

Are you denied a Penalty Abatement Here's what to do

Most penalty abatement requests are rejected by the IRS so don't be surprised if it is denied. If you feel that the IRS rejected your request in error, you can still appeal or have a hearing. An IRS appeals officer can conduct hearings and conferences that will assess all the facts and circumstances surrounding the abatement request.

You have 30 days to appeal the rejection letter issued by the IRS in most cases.

For assistance in filing a penalty abatement, please contact us

The Hillhurst Tax Group has the expertise to help you if you feel the IRS is forcing your to pay unfair penalties because of circumstances beyond your control. Our knowledgeable staff will help you determine if you are eligible for an IRS penalty reduction and can represent you throughout the entire process to protect your rights.

Qualifying taxpayers are not likely to use the IRS's first-time abatement penalty waive (FTA), even though it was introduced 12 years ago. FTAs can be obtained for failure to file, failure to pay, or failure to deposit penalties.
An FTA may be claimed by a taxpayer for a single tax period. Taxpayers must not have received any additional penalties exceeding "significant amounts" for the same tax return in the last three years. They must also comply with all filing and payment requirements.
The Reasonable Cause Assistant (RCA), a software decision-support tool used by IRS personnel, helps determine if a taxpayer is eligible to receive an FTA. The RCA has been criticized because it can make incorrect determinations about FTA eligibility, which IRS personnel usually do not correct.
A practitioner can often convince the IRS to reverse an incorrect initial determination that a taxpayer is not eligible for an FTA by persevering.

It is safe to assume that most taxpayers dislike paying taxes and hate paying IRS penalties, especially when the penalties seem unjust. While penalties can also seem arbitrary to taxpayers, IRS policy is clear and deliberate on their reason for existence: to deter taxpayer noncompliance, not to generate revenue.

The IRS established the first-time penalty abatement administrative waive (FTA) 12 years ago. This allows generally compliant taxpayers, both individuals, and businesses, to request the abatement or removal of penalties the IRS has assessed against them. The IRS offers a one-time penalty waiver (FTA) to taxpayers who are typically compliant. This can help taxpayers save hundreds, sometimes thousands, of dollars.

According to a 2012 Treasury Inspector General for Tax Administration report (TIGTA), few taxpayers are eligible for FTA. The problem is that both tax professionals and taxpayers don't know FTA exists. Additionally, IRS representatives frequently incorrectly deny an FTA by using the flawed automated decision tool the IRS to make penalty determinations.

FTA is a secret to tax professionals and taxpayers. They may not know how it works, what to do to request it, or even if it exists. This article explains the IRS FTA waiver, and how clients can remove certain penalties by using it.

Penalties and Abatement

The IRS assessed 37.9 Million penalties to taxpayers in fiscal 2012. This is 74% of all penalties assessed for 2012. Most penalties are assessed automatically by the IRS, regardless of the taxpayer's financial situation.

Methods to Request Penalty Relief

Taxpayers have three options to request relief from penalties for failure-to-file, failure-to-pay, or failure-to deposit penalties depending on their circumstances:

The taxpayer can request that the IRS not automatically impose a penalty before the IRS assesses it.
The IRS can assess a penalty and the taxpayer can request abatement. This is usually done by sending a letter to the IRS or calling the IRS. The IRS e-services allow tax professionals to request abatement.
After paying the penalty, taxpayers can ask for a refund by completing Form 843, Claim For Refund, And Request For Abatement. The return must be filed within three years from the due date or filing date.

There are reasons to request abatement

There are generally four categories of relief from penalties: reasonable cause, statute exceptions, administrative waivers, and corrections by the IRS. The administrative waiver is a category in which the IRS can formally interpret or clarify any provision to provide administrative relief from penalties it would otherwise assess. An IRS administrative waiver can be addressed in a policy statement or news release. It may also address other formal communications stating that the IRS policy is to provide relief from penalties under certain conditions. FTA is the most common administrative waiver.

Waiver of Abatement for the First Time

FTA was established by the IRS in 2001 to ensure that penalties are reduced consistently and fairly. It also rewards past compliance and encourages future compliance. An administrative penalty waiver is available to first-time taxpayers who are not compliant with tax laws. It allows them to request the abatement of penalties for a single tax period: one tax year for an individual or business income taxes, and one quarter for payroll taxes.

TIGTA reported that for 2010, the average tax year 2010 individual failure to file abatement under FTA was $240 and the average failure to pay abatement was $84. However, more than 90% of people who were eligible for FTA in 2010 did not get it. The IRS doesn't make FTA available as a relief option in its penalty-related notices and on its website.

This article will discuss how to determine if a client is eligible for FTA, and how to request it at the IRS.

Penalties that are eligible for an FTA

FTA is only applicable to certain penalties or certain returns. Determine first if FTA applies to the client's particular situation.

An individual taxpayer can apply for an FTA to waive penalties and fail-to-pay or file late fees. FTA waivers are not available for estate and gift tax returns.
FTAs may be requested by payroll taxpayers and business taxpayers for failure to file, failure to pay, and/or failure to deposit penalties. Although the Internal Revenue Manual (IRM) does not specify, in practice, FTAs can be requested by business and payroll taxpayers to cover late-filing penalties for S corporations and partnerships.
FTA does not allow taxpayers to waive the estimated tax or accuracy-related penalties.

Clean Compliance Criteria

The practitioner must determine if FTA applies to the client's case. This involves the most complex part of requesting an FTA. The client must show compliance with filing and payment requirements and have a clean record of any penalties.

The client must comply with the filing compliance rule by having filed or extended all required returns. There must also not be an IRS request for unfiled returns. The client must have also paid or arranged for payment of any tax due to meet the payment compliance requirement. As long as the client is current on their installments, an open installment agreement can be entered into by him. The IRM states that the IRS should offer a taxpayer who is not in compliance with the payment requirements and opportunity for compliance and thereby be eligible for an FTA. Before the IRS determines whether the penalty can or cannot be reduced, a reasonable cause must be shown.

The client must not have had any penalties exceeding a "significant" amount in the three prior years. This is required to meet the requirement for clean penalty history. IRS procedures do not publicly define a "significant" amount. The IRS does not publicly define a "significant" amount in practice. If the IRS denies a client's request due to a small penalty assessment, they should remind them of the IRM "significant" qualification.

If the client has a clean record of penalty violations, they will be disqualified from an FTA.

A penalty that was assessed more than three years before the tax return in question.
Any reasonable cause relief from penalties received in the past.
Have received an FTA for more than three years before the tax return in question.
Penalties for subsequent tax years.

Requesting an FTA

Per phone or e-services: A practitioner can request an FTA if they determine that the client is eligible. There are many ways to request this FTA. Begin with the simplest methods. Start with simple methods. Accounts Management representatives have the authority to grant an FTA.

An IRS compliance unit will assess the penalty. This means that you cannot request an FTA from a PPS representative, or via e-services. A taxpayer with an IRS Collection or Appeals case, or who is underreported inquired, will be subject to penalties based upon the facts and circumstances. Penalty relief must usually be requested from the unit that assessed the penalty.

Remember that the IRS has an unpublished ceiling on how many penalties the IRS can abate under FTA via phone or e-services (known as oral statement authority). For tax administration purposes, the IRS removes the threshold amount for oral statement authority in its IRM.

The IRS may require taxpayers to submit documentation to support their claim to make reasonable-cause determinations. An IRS representative will accept "credible information" either orally or in writing. The representative will be prompted by the automated Reasonable Cause Assistant of IRS (see below) to request documentation. If penalties are greater than the threshold, waivers will still apply. However, IRS procedures require that FTA requests be made in writing. 23 When requesting an abatement of penalties amounts exceeding ten thousand dollars, it is advisable to ask for an FTA in writing.

In writing To increase your client's chances of having the penalty lifted, include any other relevant penalty relief arguments including reasonable-cause arguments.

If there is clear and reasonable cause for the penalty, the client should present the reasonable-cause argument first. The IRS will then abate the penalty based on these grounds. This is a good practice as the client might need to use FTA waivers for subsequent years. An abatement due to reasonable cause will not prevent the client from receiving an FTA.

The IRS may refuse to grant an FTA if the client is technically ineligible for one because of a penalty within the last three years, but the client is otherwise compliant. The IRS should be reminded that FTA is not applicable and the client's compliance history, excluding the one instance of noncompliance, is clean.

If the client has multiple years' worth of penalties, you can request an FTA for that first year. The previous three years must have had a clean compliance record. Other arguments such as reasonable cause can be used if applicable.

Example: C late-filed returns with a balance due from 2010 through 2012. The IRS assessed C's failure to file and failure to pay penalties for all years. In addition, she has assessed an estimated tax penalty in all years for not having paid enough estimated taxes and withholding. These were the first instances of noncompliance by the taxpayer. C The tax professional for the taxpayer determines that there is a reasonable cause for her 2012 noncompliance based on her facts, circumstances, and the application reasonable-cause criteria. The tax practitioner requests an FTA to abate the penalty of failure-to-pay and failure-to-file penalties for 2010. FTA waivers cannot reduce the estimated tax penalties.

The IRS service center should receive the written FTA request.

IRS Abatement Decisions Often Flawed

The IRS uses an automated tool to evaluate the request of a taxpayer or practitioner who calls or writes to it. The Reasonable Cause Assistant (RCA) is a software program that aids in the application of penalty abatements uniformly. This program was created to assist IRS employees in making penalty relief decisions for individuals (failure-to-file penalties and failure-to-pay penalties) as well as businesses (failure–to-deposit penalties). This program is required by the IRS to be used by employees to determine penalty abatement requests.

Although the IRS tried to apply penalty abatement determinations uniformly and consistently, the IRS's use of the automated RCA led to inaccurate determinations, including the FTA decision. A 2011 IRS Advisory Council report found that 55% of penalty abatement requests were incorrectly determined by the RCA. A TIGTA 2012 report found that 89% of the abatements made using the RCA were incorrect. TIGTA employees did not correct any of the incorrect determinations in the TIGTA sample. This was even though the determinations were inconsistent with IRM penalty abatement procedures. IRS employees have the right to abort the RCA process if it conflicts with penalty abatement policies. If an IRS employee cancels the RCA process, he/she can make a decision based upon whether the facts of the taxpayer meet the requirements for FTA qualification.

Before contacting the IRS, be prepared to research the client's compliance history and apply the qualification rules. If the representative claims that the client qualifies, but the client is not, the representative can override the RCA determination. Ask the representative for his manager if he refuses to override it. If all other options have failed, you can contact the Taxpayer Advocate Service for assistance. Remember that IRS representatives are often not trained in the use of the RCA and can make mistakes. A practitioner who is certain the client is eligible can call back to request an FTA if the IRS representative is not clear about the program.

A practitioner can, in most cases, obtain an FTA from the IRS PPS representative if they have the facts and qualifications.

Confirmation of FTA

An FTA is a letter that the IRS sends to a client. It includes Letter 3502C or 3503C for an individual failure-to-file and failure-to-pay penalty abatement, and Letter 168C (or an equivalent) business failure-to deposit penalty abatement. The letter is usually delivered within four weeks of the IRS granting the FTA.

Future of FTA

As it works to close the $450 billion annual tax gap, encouraging compliance is one of its main goals. Penalties have been used by the IRS to achieve this end. The number of penalties imposed has increased by 34% over the past 11 years from 28.3million penalties in 2002 to 37.9million in 2012. But, to encourage voluntary compliance, the IRS must enforce penalties fairly and consistently.

Why not grant an FTA to all taxpayers who are eligible in the interest of consistency? To promote fairness, the TAS suggested that this concept be implemented. The TAS suggested that the FTA waiver should be applied automatically before the penalty is assessed in its 2010 report to Congress. This would replace the requirement for taxpayers to request one. FTA waivers are intended to encourage compliance in the future and reward compliance. TAS's 2010 report noted that the number of penalty abatements has declined as penalties have been assessed. This shows that FTA and other penalty relief options are not encouraging compliance.

However, the FTA could be denied to all eligible taxpayers. This could lead to a weakening of penalty administration. For the IRS to encourage compliance, it is a tangible opportunity to provide abatement notices to taxpayers. The IRS communicates with taxpayers through the abatement notice and associated discussion. This is a quantifiable way that the IRS can make sure they understand the consequences of non-compliance in the future.

In its response to the 2010 TAS report to Congress, the IRS stated that it is examining whether FTA improves compliance and whether a system should be developed to allow FTA waivers before penalty assessments. The IRS has yet to conclude the study.

The IRS must create a uniform policy that eliminates errors due to reliance on its RCA. It also needs to train the personnel who will be reviewing penalty abatement requests to ensure consistency. In 2011, the IRSAC Small Business/Self-Employed subgroup recommended that the IRS develop a clear penalty abatement request form that would guide taxpayers in evaluating their circumstances against penalty abatement criteria, including FTA. This form would clarify the requirements for penalty abatement and allow taxpayers to request it. It also will make it easier to be fair and consistent. This form should be available to practitioners in the future.

Report points out that Form 843 Claim For Refund can be used to reduce penalties. However, it was not created for that purpose as it doesn't direct taxpayers on how to comply with abatement requirements. IRSAC stated that the Form 843 instructions regarding penalty abatement are "confusing at worst." It is not intended for unpaid penalties. It is meant to be used for refund requests after payment, and not for penalty nonassertion. Form 843 Instructions were updated in December 2012. However, they did not allow it to address potential penalty abatement arguments or simplify abatement requests.

TIGTA and TAS report highlight the inconsistent application of penalty reduction by the IRS. The IRS is likely to make changes in its procedures and requirements for requesting and granting penalties abatements. If the client is eligible, the practitioner can request and obtain relief from the client's penalty charges using this beneficial, but a largely unexplored administrative waiver.

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