Tax Dictionary – First-Time Penalty Abatement

IRS Definition

You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the IRS’ First Time Penalty Abatement policy if the following are true:

  • You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
  • You filed all currently required returns or filed an extension of time to file.
  • You have paid, or arranged to pay, any tax due.

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If you have a clean compliance history, you may be able to get relief from certain late-filing and late-payment penalties using the IRS’ administrative waiver called first-time abatement (FTA). FTA has been an option since 2001, but few taxpayers actually use it. A 2012 report showed that only 8% of the 1.65 million individual taxpayers who qualified for FTA actually requested it.

FTA is mainly used to remove (abate) the failure to file and failure to pay penalties for individuals and businesses. Employers with payroll-deposit obligations can also request FTA for the failure to deposit penalty.

FTA requires a clean compliance history, which means you haven’t had certain penalties in the past three years. FTA removes penalties from only one tax period. For example, if you get a late-filing penalty in 2016, you’ll qualify for FTA if you don’t have any failure to file, failure to pay, or accuracy penalties for 2013 to 2015. (The estimated tax penalty won’t disqualify you from FTA.) But, if you get another failure to file or failure to pay penalty in 2017, 2018, or 2019, you wouldn’t be able to use FTA to abate these penalties.

Here are other important details about qualifying for FTA:

  • You must have filed all required tax returns.
  • If you owe back taxes, you must be in an agreement with the IRS to pay the back taxes (such as an installment agreement, extension to pay, or currently not collectible status). You must be up to date on payments and following the terms of the agreement.
  • You can request FTA multiple times on the same tax year. This would happen if you ask for FTA, still owe a balance and make payments on an installment agreement, and ask for FTA on the remaining accrued failure to pay penalty when the installment agreement is almost paid off or completed.

You can call the IRS directly to request FTA. A letter isn’t required. But, because IRS employees aren’t always aware that FTA will abate business and employment tax penalties, you may have to write the IRS to request FTA for businesses and employers.

FTA is allowed for the following forms:

  • Form 720, Quarterly Federal Excise Tax Return
  • Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
  • Form 941, Employer’s Quarterly Federal Tax Return 
  • Form 943, Employer’s Annual Tax Return for Agricultural Employees
  • Form 944, Employer’s Annual Federal Tax Return
  • Form 945, Annual Return of Withheld Federal Income Tax
  • Form 1040 series, U.S. Individual Income Tax Return
  • Form 1041, U.S. Income Tax Return for Estates and Trusts
  • Form 1065, U.S. Return of Partnership Income
  • Form 1120, U.S. Corporation Income Tax Return
  • Form 1120S, U.S. Income Tax Return for an S Corporation
  • Form 2290, Heavy Highway Vehicle Use  Tax Return
  • Form 5471, when filed with Form 11201, Information Returns of  U.S. Person with Respect to Certain Foreign Corporations
  • Form 5472, when filed with Form 11202, Information Return of  25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

FTA isn’t allowed for the following forms:

  • Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return
  • Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return
  • Form 990, Return of Organization Exempt from Income Tax
  • Form 1096, Annual Summary and Transmittal of U.S. Information Returns (regarding failure to file information statements, such as Forms 1099, W-2G and 1098)
  • Form W-3, Transmittal of Wage and Tax Statements (regarding failure to file Forms W-2)
  • Form 5471, when filed alone
  • Form 5472, when filed alone

Learn all the options you may have to address IRS penalties.

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