The Internal Revenue Service (IRS) does offer relief from tax penalties and interest. This IRS calls the relief they provide for penalties as penalty abatement. IRS penalty abatement means that the IRS has forgiven and removed the penalty from the taxpayer's account. If the taxpayer has already paid the penalty they may still be eligible for abatement in the form of a refund of the penalty. Getting a penalty removed or refunded is a service you can do for a taxpayer who has hired you for tax representation.
There are 3 different types of penalty abatement that the IRS offers to taxpayers.
They are:
The one we are going to focus on for this article is first time penalty abatement.
First Time Abatement
First time abatement is the equivalent of a get-out-of-jail-free card for taxpayers who have a history of tax compliance. What does tax compliance look like? The taxpayer must have filed the same return type for the past 3 years if required. They also cannot have had any penalties during the prior 3 years or any penalty the IRS removed for reasonable cause.
So if your client has a qualifying penalty in 2023 they can not have had the same penalty in the prior 3 years. If 2023 is the first year the IRS requires them to file that type of return they are still eligible for the first time abatement.
Let's say that your client Jill has a failure to file penalty of $2,500 in 2022. Her first year the IRS required her to file a tax return was 2020. She filed 2021 on time and 2020. Since there is no filing requirement for 2019 she still meets the tax compliance requirement to qualify for first time penalty abatement. You can confirm this by pulling her 2019, 2020, and 2021 account transcripts and seeing the no filing requirement and the timely filings.
Not all IRS penalties are eligible for first time penalty abatement. This does not mean that the IRS cannot remove other penalties. It means that you must fill out Form 843 or a written statement requesting the removal for your client. Let's take a look at the penalties that are eligible for first time penalty abatement.
What Penalties Qualify for First Time Penalty Abatement?
Three IRS penalties are eligible for first time penalty abatement. Let's look at them in more detail below.
The failure to file penalty is the IRS penalty for late filing of a tax return. This IRS assesses this penalty to individuals, partnerships, and corporations. For individuals, the IRS maxes the penalty out at 25% of how much the taxpayer owes.
Let's say that your client owes the IRS $10,000 and they file the return 5 months late. The IRS will assess a $2,500 failure to file penalty. If they are eligible you may be able to get that $2,500 removed with first time penalty abatement.
For partnerships and s-corporations the IRS calculates the penalty per partner/shareholder multiplied by the amount of months the taxpayer filed the return late. Unfortunately, non-profits with failure to file penalties are not eligible for first time penalty abatement.
The failure to pay penalty is the IRS penalty for late payment of taxes with a return. This penalty is eligible for penalty abatement but it does not make sense to request abatement until the taxpayer pays the debt off. The reason is, that the penalty accrues, along with interest, based on the amount that the taxpayer still owes.
Once the taxpayer pays the initial tax assessed it makes sense to request abatement of this penalty. If the taxpayer pays the penalty you have 2 years from the date of payment to request the refund of that payment.
Failure to Deposit Penalty
The failure to deposit penalty is the payroll tax version of the failure to pay penalty. The IRS requires employers to make deposits of payroll taxes on a set schedule. Failure to do so results in this penalty. The IRS can assess this penalty if the deposit is late or the wrong amount. It is important to stay on top of the schedule the IRS has set for payroll deposits.
How Do You Request IRS Penalty Abatement?
You can request first time penalty abatement for your client verbally or in a written statement. To do this you will need to have a 2848: Power of Attorney and Declaration of Representative on file for that client with the CAF unit. Unlike requesting reasonable cause abatement, which you can only request in writing. When requesting first time penalty abatement you can call 1 of 2 numbers.
The first is the number that is in the top right corner of your client's letter or notice. However, as their representative, you may also call automated collection services (ACS) directly. You can find that number here - 11 Must Have IRS Phone Numbers for Tax Professionals.
Before making the phone call you should confirm that the client qualifies for abatement. This may not be possible if you haven't had an opportunity to look at the transcripts prior to the call. If you haven't, that's okay. When you are on the phone with the revenue agent doing a compliance check be sure to ask, is anything eligible for first time penalty abatement?
Remember, you have not because you have not. The only thing you need to do to verbally request first time abatement is ask for it while you are on the phone. The revenue agent will process the request while you are on the phone. Now getting through when calling the IRS can be tricky. That is why some tax professionals opt to send in a written statement or Form 843: Claim for Refund and Request for Abatement.
Form 843
You can use Form 843 to claim a refund or request abatement of certain penalties, additions to tax, and interest. It is not limited to those things but that's what we will cover today. If the taxpayer has already paid the penalties you can use this form to request a refund of the penalty.
You have a limited amount of time to get this refund for your client. The final date you can request the refund is the refund statute expiration date (RSED). This date is 2 years after the taxpayer paid the penalty. I walk you through how to prepare Form 843 in the video below.
Now It's Your Turn
Now that you understand first time penalty abatement let's take some actionable steps.
1 - If you are working on a client's file pull out the transcripts. It is always important to get years before the year that the debt starts. For example, if the debt begins in 2017 you want to go back to at least 2014. This allows you to see if the taxpayer was compliant before the year when the penalty is.
Take the transcripts out. Are there failure to file penalties or failure to pay? If so, you want to check to see if the 3 tax years before that year got filed on time. If they were and there is no failure to file penalty then the year you are working on is eligible for first time penalty abatement. Remember, the IRS cannot have assessed the penalty in question for the prior 3 years. You need the prior 3-year account transcripts to check for this.
2 - First time abatement can be an easy win for you in building rapport with a client. If you have pulled the transcripts before doing a compliance check and see a penalty you feel may be eligible for FTA call ACS directly. The practitioner priority line for accounts not in collections cannot help you remove the penalty.
3 - Do you have clients in your book of business right now who have failure to file penalties? Failure to pay penalties? If so take into consideration how long they have been your client. Was the year they filed late a one-off? If so this may be your opportunity to get a FTA case. Look in your book of business before marketing for abatement.
4 - How do you feel about doing first time abatement for your clients? What questions/concerns do you have right now?
Timalyn S. Bowens EA is America's Favorite EA and Tax Expert who will work hard to find a customized legal solution for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn can fight the IRS for taxpayers in all 50 states. As the host of Tax Relief with Timalyn Bowens and a YouTube content creator she empowers taxpayers to make educated decisions about their tax situation.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information.
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