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IRS First Time Abatement of Penalties (FTA)
An IRS penalty is a method that the government uses to ensure compliance of its taxpayers. If you failed to file your return on time or accrued tax liability, you will be surprised how quickly the amount due on your return will increase in comparison with the tax due portion. In some circumstances the IRS might consider a penalty abatement, but only if you had reasons, such as "a reasonable cause", not to comply with your tax obligations.
However, there is a little publicized option where certain penalties can be abated for taxpayers who have a history of compliance with IRS filing and payment requirements for the last three years. This does not apply to all penalties, but can work for Failure-to-File, Failure-to-Pay, or Failure-to-Deposit, but only for one tax period. In this situation, the IRS might consider First Time Abatement of penalties (FTA).
Now, interestingly, the IRS does not grant FTA due to a reasonable cause, but solely because of your previous compliance. In other words, it does not matter why you fell behind on taxes or why you failed to file your return. As long as you filed on time and made payments to the IRS in full and on time over the past three years, you should be able to get FTA for one period of the liability.
Do you Qualify for FTA?
First of all, you need a three-year history of compliance. Now, there may be little leeway here, as the phrasing is that you cannot have any "significant" issues in the previous three years. If in doubt, contact a tax professional.
Secondly, you need to be aware that the FTA is only available for certain penalties:
For individuals these are the Failure-to-File and Failure-to-Pay penalties.
In addition, for businesses, the Failure-to-Deposit penalty is also included.
There may still be hope, even if you do not qualify for FTA. Instead, you can try to get abatement under the alternate IRS rules. The most common of these is "reasonable cause', where you prove that you only failed to comply with IRS regulations due to reasons beyond your control, such as illness or a natural disaster. Others include statutory exemptions (e.g. you owe less the $1,000, or you owed no tax in the previous year), IRS errors (if they make a mistake or provide bad advice), and administrative waivers.
How to Request FTA
FTA is not automatic - it must be requested. This is one of the reasons it's believed the IRS has not publicized this program very well. It is estimated that less than 10% of taxpayers that qualify for FTA actually request it. Imagine how much difficulty the IRS would have if all eligible taxpayers requested this.
You can call the IRS or send a letter, including full details and supporting documentation, to the Penalty Abatement Coordinator.
There is also a ceiling on the amount of penalties that the IRS will abate under this scheme, though this amount has not been published.
Furthermore, the FTA program might not be the best solution for you. For example, if you could abate current penalties under, say, reasonable cause, then you could save your "one time use" FTA for any future problems. This is complicated by the fact that the IRS internal systems appear to be making mistakes, such as applying FTA where reasonable cause has been requested, and vice versa.
You can certainly request FTA yourself. However, it is usually a good idea to consult a tax professional to determine your best way of achieving successful penalty abatement.
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