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Your Guide to an IRS First-Time Penalty Abatement

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    Key Takeaways:

    • The IRS created the first-time penalty abatement in 2001 to reward previously compliant taxpayers when they make a mistake, like failing to file on time, pay their full tax bill, or deposit the correct amount
    • The IRS uses three criteria to determine eligibility for abatement:
    • You’ve filed tax returns on time for the last three years
    • You’ve paid your full tax bill for the last three years
    • You have no other tax-related offenses over the last three years
    • The five steps to request a first-time penalty abatement are:
    1. Receive a notice from the IRS
    2. Call the IRS to make the request
    3. Send a written statement or Form 843
    4. Pursue a penalty appeal
    5. Look into other types of penalty relief
    • Also remember common pitfalls, such as: You still have an obligation to pay your full tax liability, you shouldn’t try to negotiate with the IRS, and you can only make one abatement request per year

    It can be distressing to get hit by a penalty from the IRS. You may already be worried about covering your tax bill, and then you have to deal with an additional fee plus interest. Tax issues can cause a lot of stress for Americans, but if you stay on top of tax deadlines, follow applicable laws, pay what you owe, and communicate with the IRS when you’re having a problem, you will generally stay in good standing.

    The IRS created penalties to ensure taxpayers comply with tax law. The agency established the first-time penalty abatement administrative waiver in 2001 to allow people who are usually compliant with filing their tax return and paying taxes on time to get relief from a charge. First-time penalty abatement means you won’t have to pay the penalty if you qualify and it’s your first offense.

    Many taxpayers, however, don’t know they can request abatement if they’ve stayed compliant with their taxes in the past. This guide walks through everything to know about first-time penalty abatement , including which penalties can be abated, how to quality, steps to make a request, and common pitfalls for taxpayers. 

    What Is First-Time Penalty Abatement?

    Penalty abatement is when the IRS approves a taxpayer’s request to reverse a penalty for doing something wrong, like failing to file a tax return or not paying their tax bill on time. Abatement is meant as a kind of reward for past compliance, so if you have been in good standing in the past, the IRS will usually grant your request for this first penalty you receive.

    Not all penalties can be abated under the current tax law, however. Here are the types of penalties that are eligible for first-time abatement:

    • Failure to File: This penalty is for not filing your tax return, partnership return, or S corporation return
    • Failure to Pay: You will receive this penalty when you don’t pay the tax due according to your tax return by the due date or by the deadline in a notice or demand for payment
    • Failure to Deposit: This penalty is issued when you don’t deposit the correct amount of tax by the due date or in the way the IRS requires

    Note that it doesn’t matter how much your penalty is. The IRS will consider abatement for any penalty amount.

    How to Qualify for an IRS First-Time Penalty Abatement

    The IRS only approves requests for abatement if you are considered tax compliant. This means you’re current on your tax requirements, like filing and paying, other than the situation in your request. These are the three criteria the IRS considers when you ask for first-time penalty abatement:

    1. You File Your Tax Returns on Time

    You need to have a record of filing your tax returns on time. This does not mean, however, that you can’t have an extension. You can. The IRS will look at if you have filed the same type of return for the last three years before you received the penalty.

    2. You Have Paid Your Taxes

    You also need to be current on all tax payments you owe, other than the taxes for which you’re requesting relief. You can request first-time abatement even if you haven’t paid the current tax at hand in full. Just note that the penalty will continue to build interest until the tax is paid.

    3. You Don’t Have Other Offenses

    The IRS will make sure you have a clean record for the last three years. You can’t have any penalties during that time, including penalties removed because of first-time abatement.

    The IRS generally allows taxpayers to make a mistake if they have a record of being compliant. Make sure you assess your last three years of returns before making an abatement request. Talk to a tax expert if you’re unsure about what to look for.

    Five Steps to Request First-Time Penalty Abatement

    You have a few options when you decide you want to request first-time abatement. You can usually call or send a letter to the IRS. Here is how the process works, step-by-step:

    1. You Receive a Notice From the IRS

    Expect to get a notice in the mail from the IRS when you fail to file a tax return or fail to pay your tax bill in full. This notice will outline your balance due and the amount of the penalty. Follow the instructions on your notice to begin the abatement request process.

    2. Call the IRS to Make Your Request

    Your notice should include a toll-free number to contact the IRS, which is usually located in the top-right corner. Calling could mean you get an answer to your request much faster. Make sure you get the contact information from the agent you speak to in case you need to follow up. You may still need to send a written letter about your request.

    3. Send a Written Statement or Form 843

    You can also decide to send in a written statement to the IRS to request penalty abatement. Use Form 843, Claim for Refund and Request for Abatement, to provide all the applicable information so the agency can assess your situation and history. You will have to provide an explanation on Form 843 about why you believe the IRS should approve your request.

    4. Pursue a Penalty Appeal

    The IRS may reject your request if you don’t meet eligibility requirements. You can then move forward with a request for an appeals conference or hearing. File your appeal request within 30 days of receiving the rejection letter and make sure you refer to that letter in your request. The IRS states that you can pursue this route if:

    • You received an IRS notice about a failure to file or failure to pay penalty
    • You sent a written request to the IRS to remove the penalty
    • Your penalty abatement request was denied
    • You received a rejection letter

    5. Look Into Other Types of Penalty Relief

    Penalty abatement isn’t the only way you could get your penalties waived. There are two other methods the IRS uses for relief: reasonable cause and statutory exception.

    • Reasonable cause: The IRS states that some taxpayers who “acted with reasonable cause and in good faith” may be able to have penalties removed or lowered. This applies to situations when the taxpayer does everything they can to file and pay on time but can’t for reasons outside of their control, like a natural disaster, death, serious illness, or issues with the electronic filing system. Reasonable cause doesn’t apply to the estimated tax penalty. You will need to provide proof that supports your request.
    • Statutory exception: These types of exceptions include if a taxpayer used incorrect advice from the IRS, mailed their tax return on time but still received a penalty, lived in a federal disaster area, or took part in the military in a combat zone.

    The IRS will generally grant first-time penalty abatement if taxpayers meet all the requirements and have stayed in good standing with the IRS in previous years. Sometimes, however, you may need to look into appealing a decision or these other forms of relief if your request is rejected. 

    Common Pitfalls of First-Time Abatement Requests

    Making a first-time abatement request should be your first step if you receive a penalty notice for the first time. However, many taxpayers don’t fully understand their obligations or how these requests work. Here are a few additional tips to remember about first-time abatement requests:

    • You may be able to get first-time penalties completely waived by the IRS. Don’t pay more than you have to. Put in your request right away to try to get rid of the charge.
    • Don’t try to negotiate when you make a request. The IRS will see if you qualify or not, and they will either approve the abatement or not. 
    • Each penalty will accrue interest until you pay the full balance of what you owe. However, the IRS will remove or reduce interest on failure to pay or failure to file penalties if those penalties are removed or reduced. Just make sure that in your situation, you’re not still on the hook for interest.
    • Don’t forget about paying what you owe. That abatement just removes the penalty and its interest, not your original tax bill.
    • The IRS will, in some cases, change a reasonable cause relief request to a first-time abatement request if you qualify for first-time abatement. They will notify you of that change.
    • The IRS will also consider you for reasonable cause relief if they find you do not qualify for first-time abatement.
    • You can only make a first-time abatement request for one tax period at a time. That means you need to fill out a Form 843 for each year.
    • Pursue an appeal, especially if you have a large penalty. You may be able to convince the IRS that they made a wrong determination initially and persuade them to reverse their rejection of your request.
    • Remember that you can request to set up a payment plan if you’re unable to pay the full amount of tax you owe the IRS. This plan will set up a monthly payment amount that will cover what you owe over an extended period of time.

    The best thing you can do if you fail to file on time or pay your full tax amount is to act as quickly as possible. You want to avoid accruing interest and additional fees so you aren’t on the hook for even more money. A tax professional can help you create a plan of action when you’re worried you did something wrong or missed a deadline.

    Contact Silver Tax Group about IRS First-Time Penalty Abatement Options

    Facing penalties from the IRS is never fun. The good news is you have options, and the IRS may be forgiving in the right circumstances. It’s always important to be honest with the agency about your situation so you don’t have to deal with additional penalties or legal issues.

    Talk to an experienced tax attorney when you’re unsure what to do or you have questions about how the abatement request process works. The Silver Tax Group team will get to know your situation and provide guidance on how you should move forward. We know how important it is to ensure you pay the least amount of tax and penalties legally possible.

    Our experienced tax attorneys help with audit defense, tax litigation, tax debt resolution, emergency tax services, tax fraud investigations, general tax consulting, and much more. No matter what tax issue you’re facing, we can help. Reach out to Silver Tax Group to speak to a tax expert about first-time penalty abatement requests.

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