IRS Makes Changes To Its First-Time Abate Penalty Waiver

This is an update to my previous article: IRS First-Time Abate Penalty Waiver and the Report from the Treasury Inspector General for Tax Administration, published on October 26, 2012. 

The IRS has updated its First Time Abate program for penalty relief. This program allows taxpayers a one-time waiver the first time a failure to file, failure to pay or failure to deposit penalty is charged. The waiver is available for only one tax period. 

According to the update, in order to qualify for relief the taxpayer must have 

1. Filed all tax returns
2. Paid or arranged to pay all tax currently due (for example, the taxpayer has set up an installment agreement and is current with his or her payments). 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

IRS First-Time Abate Penalty Waiver and the Report from the Treasury Inspector General for Tax Administration

Update: IRS Makes Changes To Its First-Time Abate Penalty Waiver (6/17/13)

Have you heard of the IRS's First-Time Abate penalty waiver program (FTA)? If you haven’t you’re not alone.  Few taxpayers and tax professionals were aware of this program until a report from the Treasury Inspector General for Tax Administration (“TIGTA”) came out on October 17, 2012 auditing it.  This is because this program is not publicized by the IRS.  The only IRS overview of the program is in its Internal Revenue Manual (“IRM”) guidelines (20.1.1.3.6.1), which is a manual for IRS employees.  In its report, TIGTA points out that there is no mention of the FTA in the 1040 instructions, on the IRS’s website, “Eight Facts on Penalties,” or on balance due notices sent to taxpayers. 

The FTA is an administrative waiver which began for the 2001 tax year.  Ordinarily, taxpayers must show reasonable cause, a statutory exception or IRS error before the IRS will abate penalties.  A showing of reasonable cause requires an explanation that the taxpayer exercised ordinary business care and prudence in determining his tax obligation but nevertheless failed to comply with his obligation due to some specific circumstances.  Instead, the purpose of the FTA is to reward past tax compliance and promote future tax compliance.  Therefore, no showing of reasonable cause is required before relief is granted. 

As part of this program, the IRS will waive failure to timely file and timely pay penalties for a specific tax year as long as the taxpayer has demonstrated full compliance over the prior three years.  This relief is not automatically granted since in order to obtain the FTA waiver, the taxpayer must request it. 

TIGTA’s report analyzes the FTA program and provides several recommendations for improvement.  The IRS is currently in agreement with many aspects of these recommendations and is working to implement them.  If these recommendations are incorporated, the FTA will undergo substantial changes.

• TIGTA Recommends That The FTA Waiver Be Better Used to Promote Tax Compliance

Currently, in order to obtain an FTA waiver, taxpayers are not required to demonstrate full compliance by paying their current tax liability.  This feature of the program was criticized by TIGTA’s report and will likely be modified by the IRS.  TIGTA argues that allowing taxpayers relief before the liability is paid in full goes against the purpose of FTA.  Instead, FTA relief should be contingent upon the payment of the liability.

• TIGTA Recommends That The IRS Develop A Process To Address The Negative Impact To Taxpayers Who Qualify for Both FTA And Reasonable Cause Relief.

Current IRS procedures provide that when taxpayers qualify for both an FTA waiver and penalty relief based on reasonable cause, they are to be granted FTA waivers.  The reason for this policy is that it simplifies the abatement process, thereby conserving IRS resources.  TIGTA’s report determined that this process hurts certain taxpayers because they will be prevented from receiving FTA waivers in the future and the portion of their penalties abated may be reduced.  

For example, according to TIGTA's report, If a taxpayer’s penalties are abated due to reasonable cause in 2010, he may qualify for an FTA waiver for 2011.  Instead, when the taxpayer is granted an FTA waiver despite his reasonable cause in 2010, he is precluded from using the waiver in 2011.  If he has no reasonable cause excuse in 2011, he is left with no recourse. 

Furthermore, according to TIGTA's report, under the FTA waiver, abatement of the failure to timely pay penalty includes the assessed amount of the penalty but not the accrued amounts.  An abatement of the failure to timely pay penalty due to reasonable cause includes both the assessed and the accrued amounts.  The failure to timely pay penalty can reach 25% of the unpaid tax liability if it is left to accrue indefinitely.  Furthermore, while the penalty continues to accrue, it is only assessed periodically and most of the penalty is never officially assessed until there are funds in the taxpayer’s account to pay all or part of the penalty.  Therefore, a taxpayer seeking to abate the accrued amount of the penalty after an FTA waiver will have to submit an abatement request based on reasonable cause.  

As evident from TIGTA's report, the FTA has a lot of room for improvement.  Nevertheless, it's an important program of which taxpayers and their representatives must be made aware.  Over a million taxpayers are missing out every year on obtaining relief from penalties which they do not have to pay.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

What Should You Know If Your Case Has Been Assigned To An IRS Revenue Officer

Who Is An IRS Revenue Officer 

An IRS revenue officer ("RO") is a highly trained employee of the IRS collection division.  ROs are granted total collection authority by the IRS and are therefore able to make phone calls and visit you at home or at your place of business.  If you are not at home or work when the RO comes to visit, he or she will leave a request that you contact them by a specific date.  This request should not be ignored.  If you do not voluntarily comply with this request, the RO has the power to summons you to a mandatory meeting.  The RO also has the power to garnish wages and bank accounts, seize accounts receivables and seize property.  It is very common for an RO to use these collections techniques against an uncooperative taxpayer.

Every RO is different.  I have personally worked with many ROs who care deeply about a taxpayer's situation and do everything in their power to find the best solution possible.  I have also worked with unreasonable ROs who don't have patience for excuses and are quick to garnish wages and seize bank accounts.

The bottom line is that ROs are people with a very difficult and dangerous job. Although they do not carry weapons or make arrests, they do work long hours and make face-to-face contact with many unreasonable and desperate people.  It is not uncommon for an RO to be threatened on the job.  Dealing with a reasonable and responsive taxpayer is often a welcome opportunity for an RO.

Why Is An RO Assigned To Your Case?

If you owe the IRS money, the IRS may assign your case to an RO for a number of reasons.  These include: (1) you owe a large debt (2)  you owe payroll taxes (3) you have unfiled tax returns and/or (4) the regular IRS collection division has been unsuccessful in collecting from you.

What Should You Do?

If you receive a call or visit from an RO, do not ignore the RO.  Whether or not you should hire a tax controversy attorney to represent you depends on how comfortable you are dealing with the RO and the complexity of your tax situation.  If you decide to handle communications with the RO on your own, consider the following:

1. You should obtain a complete snapshot of your account with the IRS.  In order to do this, contact the IRS in order to gather the following information:
• Confirm that all necessary tax returns have been filed 
• If any tax returns have not been filed, these need to be prepared and filed immediately.  In order to get these prepared, request that the IRS send you your Wage and Income Transcripts for the tax years that have not been filed.  Wage and Income Transcripts show your W2s, 1099s, mortgage interest information, etc.  
• Request that the IRS send you an Account Transcript for each year that you have a balance.  This transcript will show you each year's balance due and the interest and penalties that have been added on.  
2. Keep in contact with the RO and comply with his or her requests.  As mentioned above, ROs have complete collection authority and will use it against you if you are unresponsive. 
3. The RO will want to resolve your account by reviewing your finances in order to determine whether you can (1) pay your balance in full, (2) pay on an installment agreement or (3) cannot pay at all. If you need more time than the RO initially allows to gather your financial information, request an extension.  Do not ignore deadlines.  
4. The documentation and information that the RO will request varies depending on your specific circumstances.  If you feel that the RO's request is burdensome or unreasonable, it may be best to contact a tax controversy attorney.
5. The RO has the power to abate delinquency penalties.  Therefore, if you have a good reason for failing to file your returns on time or failing to pay your liability in full, bring the issue up with the RO.

Finally, understand that ROs are often out of the office (making personal contact with other taxpayers) or are in training.  Therefore, it is common that an RO will take his or her time responding to your or your attorney's calls.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Understanding IRS Penalties and Penalty Abatement Requests

FAILURE TO FILE AND FAILURE TO PAY PENALTIES

When you own money to the IRS, there are two common penalties that the IRS can tack on to your liability in addition to interest.  If your tax return is filed late, the IRS will impose the "Penalty for Filing Tax Return After the Due Date (failure to file)" which is up to 25% of the net tax due.  This penalty is imposed at a rate of 5% per month, for every month that your tax return is not filed, subject to the 25% ceiling (reaching its maximum at 5 months)

The second penalty is the "Penalty for Late Payment of Tax (failure to pay)." This penalty is imposed at a rate of 0.5% per month, subject to the 25% ceiling (reaching its maximum at 50 months).  When both penalties are imposed together, the 5% failure to file penalty will be offset by the 0.5% failure to pay penalty.  This means that if you fail to file a tax return and pay the tax due on time, you will be subject to a maximum penalty of 47.5% of the net tax due (this is assuming that the failure to file and pay is not fraudulent).  These are very hefty penalties and it's best to try to avoid them if possible. 

This year, you have until April 17, 2012 to file your taxes (individual).  In the alternative, if you cannot file your taxes by April 17, you can submit to the IRS the "Application for Automatic Extension of Time To File U.S. Individual Income Tax Return".  By filing this form, you will get an additional six months to file your tax return, thereby avoiding the late filing penalty if the return is filed by October 17, 2012.  Nevertheless, this form does not extend the time to pay any taxes owed.  All taxes owed must be paid by the April 17, 2012 deadline or else the IRS will assess the late payment penalty.  

If, on the other hand, you can show that undue hardship will be suffered if payment is made on the payment due date, the IRS may grant an extension to pay.  In order to apply for this extension,  you should submit "Application for Extension of Time for Payment of Tax Due to Undue Hardship."

PENALTY ABATEMENT

If you can show reasonable cause for failing to pay and file on time, the IRS may waive the failure to file and pay penalties. In order to request abatement, you should send a letter to the IRS (either with a delinquent individual tax return or after penalties have already been assessed) describing the penalties involved and providing an explanation for why reasonable cause exists.  In the Internal Revenue Manual (IRM), the IRS states that "reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligation but nevertheless failed to comply with those obligations." 

The IRS also lists several defenses that may satisfy the reasonable cause standard.  These include 

• Death or serious illness of the taxpayer or a member of his immediate family 
• Fire, casualty, natural disaster or other disturbance and
• The taxpayer's inability to obtain records through no fault of his own.  

Even if your specific situation does not fall into one of these three categories of defenses, you should still submit a request for abatement.  

That is not to say that getting the IRS to grant your penalty abatement request will be easy.  

• First, it could take three month to a year before your penalties are abated (while this request is pending, you must either pay your liability in full or you must be making payments through an installment agreement).  
• Second, in order to get the late payment penalty abated, you need to, at least, pay the amount of tax owed (excluding interest and penalties) in full. 
• Third, it is best to submit as much proof supporting your reasonable cause defense as possible.  For example, if you are claiming illness (either your own or in your immediate family), you should submit a doctor's note supporting the illness.  

Finally, many penalties abatement letters get rejected and must be appealed before they are accepted.  At the initial stage, your defenses will be inputted into a computer program and, unless the issues are extremely clear cut and well supported per IRS standards, it is likely that you will receive a computer generated rejection letter.  Appealing the rejection is highly recommended because the IRS representative reviewing the appeal has substantially more discretion and leeway to abate the penalties.  Remember, the penalty abatement process is not a simple one but it is worth fighting for considering that you may be assessed penalties up to 47.5% of the net tax due.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.