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First Time Penalty Abatement Program

The First Time Penalty Abatement Program relief is a one-time consideration that is applied to a first-time penalty charge. The penalty relief is based upon the taxpayer’s compliance history.

Taxpayers may qualify for First Time Penalty Abatement Program relief by having their penalties for filing and paying late abated. Abatement applies under general conditions. For example, the “IRS is required by IRC 6404(f) and Treas. Reg. 301.6404–3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the IRS acting in their official capacity”.[1] If the taxpayer doesn’t qualify under this provision, the taxpayer may qualify for penalty relief under reasonable cause.

If the IRS determines that the taxpayer “exercised ordinary business care and prudence in relying on the IRS’s written advice,” then the taxpayer may qualify for penalty relief. The taxpayer must file a request for penalty relief “within the period allowed for collection of the penalty or addition to tax, or if the penalty or addition to tax has been paid, within the period allowed for claiming a credit or refund of such penalty or addition to tax."

For this reason, under the First Time Penalty Abatement Program, if the taxpayer relied on erroneous oral advice from the IRS, the IRS would be required under the referenced statute to abate any portion of the penalty. “Administratively, the IRS has extended this relief to include erroneous oral advice when appropriate”.[2] Taxpayers are instructed to contact the IRS directly for assistance. Communication between the taxpayer and the IRS will help to alleviate questions surrounding willful neglect. Although penalties for filing late will be abated, interest charges will not be abated. Instead, they will “continue to accrue until all assessed tax[es], penalties, and interest[s] are paid in full”.[3]

Typically, the initial request for relief may occur during or after an examination. In fact, the initial request for relief occurs before the penalty is assessed and is applicable to those returns filed or paid late “or after assessment of the penalty and notification issued to the taxpayer”.[4] All requests[5] are evaluated for their own individual merit to determine 1) events and parties involved, 2) whether the taxpayer exercised ordinary business care and prudence, or 3) if another type of penalty relief[6] could be applied.

With this in mind, the taxpayer’s obligation is ongoing. “Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late”.[7] Evaluation of the taxpayer’s initial request for penalty relief includes a review of the statement addressing the penalty, payment patterns of preceding years and overall compliance history, and the length of time between events.

In some cases, penalty relief may not be appropriate where a taxpayer has failed to comply with the filing requirement as a result of a death of a family member occurring a significant amount of time before the due date of the return, where a taxpayer claims that he or she was unable to meet the filing requirement “because the records necessary for filing were in the control of a third party, i.e., a bankruptcy trustee or an accountant. The records were returned to the taxpayer well in advance of the time the return was required to be filed. [In essence,] [t]he return was not filed until several months after the records were returned”.[8] The aim of the review (of the penalty relief request) is to determine “if the taxpayer could have anticipated the event that caused the non-compliance”.[9]

The First Time Penalty Abatement Program policy provision does not apply to returns that are based upon an event. Forms and tax returns that fall under this provision include those such as Form 706, U.S. Estate Tax Return, Form 709, United States Gift (and Generation – Skipping Transfer) Tax Return, and Form 1120, U.S. Corporation Income Tax Return. To request a first-time abatement, taxpayers are required to use Form 843, Claim for Refund and Request for Abatement.[10]

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[1] IRS.gov, “Part 20. Penalty and Interest, Chapter 1. Penalty and Handbook, Section 1. Introduction and Penalty Relief,” 7/26/2013)

[2] Id.

[3] Id.

[4] Id.

[5] Subsequent requests for penalty relief are typically received after the initial request for relief has been denied and are viewed as appeals to the previous relief denial (“Part 20”).

[6] The Internal Revenue Manual (IRM) references Statutory or Regulatory Exception or an Administrative Waiver as two such types of penalty relief.

[7] IRS.gov, “Part 20. Penalty and Interest, Chapter 1. Penalty and Handbook, Section 1. Introduction and Penalty Relief,” 7/26/2013)

[8] Id.

[9] Id.

[10] Form 843, Claim for Refund and Request for Abatement is available here: http://www.irs.gov/pub/irs-pdf/f843.pdf.

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