Abating Penalties with the IRS

IRS accountant review pile of files

Abating Penalties with the IRS

By Justin K. Hoffman, CPA, CA, CPA (Illinois), CFP, TEP, BComm, Tax Manager, Davis Martindale LLP

The American tax system involves some of the most complex and onerous reporting in the world.  It is of little surprise then that many taxpayers will eventually find themselves facing harsh penalties associated with failing to adequately comply with their reporting requirements.

When faced with a penalty, the Taxpayer has three main options to get the IRS to abate the penalty:

  1. The First-Time Abatement (FTA)
    The FTA gives the Taxpayer an opportunity to have the penalty waived without having to justify their conduct.  It is a one-time option and can usually only be used against one year of penalties so the taxpayer should be tactical in its application.  In selecting the appropriate year to apply the FTA, caution should be taken to ensure that the following requirements for its application are met:

    • The Taxpayer is up-to-date on filing their returns;
    • The Taxpayer has arranged to pay or has paid any tax due; and
    • The Taxpayer has had no penalties for the 3 years prior to the year being abated.
  2. The Reasonable Cause Abatement
    The Reasonable Cause Abatement provides Taxpayers with an opportunity to argue why they should not be assessed the penalty.  While the abatement can be requested over the phone, certain dollar limits exist where the IRS agent requires the request to be submitted in writing.In order to achieve consistent results, the IRS has mandated that its agents employ the use of the “Reasonable Cause Assistant” (RCA), an artificial intelligence system, in assessing whether the penalties are eligible for abatement.  Because the process is automated, the tax professional must carefully frame the abatement request within the parameters of the system to prevent the request from being disallowed.  Arguing the abatement on grounds not cited in the Internal Revenue Manual (IRM) will often require that the request for penalty abatement advance to the appeals stage.Acceptable reasons for the abatement of penalties as set out in the IRM include (but are not limited to) ordinary business care and prudence, death, illness, disaster, and errors.
  3. Appealing the Denial of Your Abatement
    If your argument for the abatement of penalties didn’t fall within the basic “yes or no” logic utilized by the RCA, you will need to request an appeal of the denial.  It is at this stage that you will have the opportunity to present your argument outside of the constraints of the RCA and to draw specific attention to the facts that may not have been considered by the agents at earlier stages of the abatement process.This discussion aims to provide a general understanding of the process for abating penalties and is not intended to be an exhaustive list of the Taxpayer’s options.  In the case of large penalties it is recommended that a qualified US tax practitioner be contacted to assist with the abatement process.