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PART II - What You Need To Know About the IRS' First Time Tax Penalty Abatement Policy & Procedures


This is part two of a two-part article on the IRS’ first time tax penalty abatement.  If you haven’t already, you might want to read the first article, which outlines the IRS’ first time tax penalty abatement policy.  That way, you can develop a good idea of whether this might apply to your situation. 

What does the IRS’ First Time Tax Penalty Abatement Policy cover? 

As a quick refresher, the IRS’ First Time Penalty Abatement Policy (FTA), covers the following types of penalties: 

  • Failure to file (FTF) penalty  

  • Failure to pay (FTP) penalty 

  • Failure to deposit (FTD) penalty 

However, the IRS also clearly indicates that a taxpayer is not eligible for FTA until: 

  • They have filed all required tax returns, or valid extensions for tax returns that are otherwise due.  Even if there are tax years for which you don’t have a penalty, all returns must be filed. 

  • The taxpayer has paid, or arranged to pay, any tax that is due.   

Even then, the FTA will not be considered if you’ve had penalties within the 3 years prior to the tax year in which you received a penalty.   

In other words, your taxes must be paid in full, or you must have entered into a payment plan for any outstanding taxes.  Not only that, but if you are in a payment plan, the IRS expects that you have kept current on your payments.  And, you have to indicate that you’ve otherwise been a dutiful taxpayer. 

Bottom line, before you can ask for any penalty relief, you have to be back on track towards paying your taxes.  Trying to get penalty relief beforehand is a waste of time.   

Next steps 

Assuming the above is correct, then you’re probably closer to the end than you think.   

Step one:  If you’ve gotten this far, then you probably have received a lot of written correspondence.  On your notices, there should be a toll-free number that you can call to discuss your options. 

Step two:  If this doesn’t work, then you might want to enlist the help of the taxpayer advocate service.  There are several options here: 

  • Contact the 800 number 

  • Fill out Form 911, Request for Taxpayer Advocate Service Assistance, then mail or fax it to your local advocate office. 

  • Call your local advocate office and schedule an appointment.  In some remote locations, the IRS offers video conferencing capability (for example, in Kenai, AK, the IRS has VTC available at the Kenai Community Library, where taxpayers will talk with the IRS office in Anchorage, or another location). 

However, the taxpayer advocate service cannot help you until you’ve laid all your cards on the table.   

Step three:  Understand that there is a difference between FTA, and other forms of penalty relief, such as reasonable cause.  Doing this will help you understand how to properly fill out the paperwork, which will  

While this difference is a nuanced one, it does highlight why it’s important to work with either the collections agent or the taxpayer advocate.  A knowledgeable IRS employee will know exactly what blocks to fill, and how to walk you through the paperwork.  Also, detailed notes are kept for each conversation, so you shouldn’t have to reinvent the wheel with each phone call.   

Step four:  Once the penalty abatement is approved, ask for written notification of the change to your tax bill.  The agent should be able to tell you the new balance over the phone (taxes owed, interest, any remaining penalties).  However, you should request this in writing as well.  That way, you can have it for your records. 

Step five (if applicable):  If your request for abatement was denied, you can appeal.  The IRS offers a penalty appeal self help tool, which outlines the conditions under which an appeal might abate your penalty.  Some of these reasons include: 

  • Reasonable cause:  This is kind of a catch-all for tax penalties could be abated, but don’t technically qualify for FTA.  Usually, this is what you would request, in addition to FTA, when working with the taxpayer advocate, in cases where your tax issues are your fault. 

  • Statutory exceptions:  In some cases, the law allows for certain exceptions.  If this applies to your situation, then you would have grounds for an appeal. 

  • Administrative waiver:  There might be a formal government directive providing penalty relief because of a catastrophic event or natural disaster.  

Keep in mind that you have 30 days from the date of your rejection letter to file your appeal.  You will want to contact the IRS well in advance, so you can best prepare yourself to request the appeal. 

Conclusion 

While it’s easy to find the IRS’ first time penalty abatement policy with an online search, the mechanics are much more complicated than you might think.  With that said, the IRS does provide a lot of resources to help you through this process.  In order to have the best change of abating your tax penalties, you should expect to be engaged and diligent. 

Incorporating tax planning into your financial planning is one of the best ways to avoid tax problems in the first place.  If you’re looking for professional help going forward, you might consider hiring a tax-focused financial planner who will help you in reaching your financial goals.