The IRS is reviewed regularly by the Treasury inspector general for tax administration, also known as TIGTA. It was recently noticed that many taxpayers were charged penalties for failure to file on time and failure to pay on time — but those penalties should have been abated or canceled. The taxpayer needed to be compliant, have a history of filing and/or paying on time for the prior three years and have requested abatement. That is known as “First-Time Abatement,” or FTA.
TIGTA estimated that for 2010, about 250,000 taxpayers with penalties for failure to file on time qualified for abatement (cancellation), but they ended up paying the penalties. They could have had the penalty canceled had they requested it and qualified for the FTA.
TIGTA estimated that for 2010, about 1,200,000 taxpayers who failed to pay on time qualified for abatement, but ended up paying the penalties anyway. The taxpayers could have requested cancellation of the penalties, but just paid the penalties instead.
Also, it found that taxpayers who qualified for abatements were not always processed accurately (what a surprise). The IRS said it is taking action to do better.
Taxpayers who demonstrated full compliance over the prior three years should be given a waiver of the penalties as a reward for past compliance and to promote future tax compliance. That is the First-Time Abatement, or FTA.
However, the taxpayer must request the relief (abatement) in writing and be able to show compliance for the prior three years. It’s sort of like our family’s story about Moses. “If Moses had not made a noise in the bulrushes, where would he be? It is sometimes important to make a noise.”
It seems most taxpayers were not aware of the FTA. If you qualify for relief (complied with filing and paying for the prior three years) and you paid the IRS for a penalty, it is OK to now write and request a refund.
If the penalty was small, it might not be worth the trouble, but the failure to file on time penalty is up to 25 percent of the tax owed. That can be a big number.
Of course you can get someone to help you request abatement of certain penalties, if you otherwise qualify. CPA firms do those requests on a regular basis.
At least you can be aware that IRS penalty notices might be canceled, especially if you have some reasonable cause (illness, accidents, etc.) or have been compliant for three years (FTA). Naturally, the IRS wants you to pay the tax if it cancels the penalty.
Did you hear? “If you don’t learn to laugh at trouble, you won’t have anything to laugh at when you’re old”.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for over 45 years. He is founder emeritus of Bullis and Company CPAs.