Source: https://www.thetaxadviser.com/issues/2013/jul/buttonow-july2013.html
Timestamp: 2019-04-20 22:38:09+00:00

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The IRS’s first-time abatement penalty waiver (FTA), although introduced 12 years ago, is infrequently used by qualifying taxpayers. An FTA can be obtained for a failure-to-file, failure-to-pay, or failure-to-deposit penalty.
Example: C filed late returns with a balance due for 2010 through 2012. As a result, the IRS assessed C failure-to-file and failure-to-pay penalties for all years. She was also assessed an estimated tax penalty for all years as a result of not paying sufficient estimated taxes and withholding. These were the taxpayer’s first instances of noncompliance. C ’s tax professional determines that she has a reasonable-cause argument for 2012, based on her facts and circumstances and the application of reasonable-cause criteria. The tax practitioner obtains an FTA for the 2010 failure-to-file and failure-to-pay penalties and submits a reasonable-cause penalty abatement request for 2012. The estimated tax penalties cannot be abated with the FTA waiver.
With TIGTA and TAS reports highlighting the IRS’s inconsistent application of penalty abatement, the IRS will likely make some changes in its requirements and procedures for requesting and granting penalty abatements in the future. For now, if the client qualifies, the practitioner can effectively request and receive relief for the client’s penalties using this largely unknown and beneficial administrative waiver.
1 IRS Policy Statement 20-1 (6/29/04) at Internal Revenue Manual (IRM) §1.2.20.1.1. See also IRM §20.1.1.2.1(4).
2 Treasury Inspector General for Tax Administration (TIGTA), Penalty Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage Voluntary Compliance, Rep’t No. 2012-40-113 (Sept. 19, 2012).
4 IRS Data Book, Table 17, “Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty,” at 42 (2012).
5 The number of penalties assessed for individual, business, and employment taxes for delinquency, failure-to-pay, failure-to-deposit, and S corporation/partnership late-filing penalties exceeded 28 million in 2012. See IRS Data Book , Table 17.
6 Form 843, Claim for Refund and Request for Abatement, does not allow requests for penalty abatement under FTA. Line 5a of the form allows abatement due to erroneous written advice by the IRS, reasonable cause, or other reasons allowed under the law. FTA is an administrative waiver and does not qualify as an “other reason allowed under the law.” See Form 843 Instructions, December 2012.
7 TIGTA Rep’t No. 2012-40-113.
8 Searching “penalty abatement” on IRS.gov yields a “top recommendation” among search results of IRS Tax Tip 2012-74, dated April 17, 2012, titled “Failure to File or Pay Penalties: Eight Facts.” First-time abatement is not mentioned.
9 IRM §20.1.1.3.6.1 (11/25/11). See also exceptions at paragraph (8).
11 IRM §20.1.1.3.6.1(5)(a) states that the taxpayer cannot have a tax period in the prior three years in TDI (taxpayer delinquency investigation) status 02 or 03, or IMF (individual master file) status 04 (delinquent return status codes). To qualify, the taxpayer should not have any required returns outstanding in the past six years. See IRS Policy Statement 5-133 at IRM §1.2.14.1.18.
12 IRS Memorandum SBSE-20-0413-0690 (4/5/13), adding new paragraph (1)(b) to IRM §20.1.1.3.6.1, amending paragraph (9), and making minor syntactical and formatting revisions elsewhere.
14 Id. The IRS redacts the explanation of “significant amount.” This is a facts-and-circumstances test, and the IRS should not use a bright line in determining whether the amount is significant. Many IRS representatives look for the presence of a penalty using penalty transaction codes on the taxpayer account to determine qualification and thus avoid making a subjective determination of whether the penalty amount is significant.
16 IRM §20.1.1.3.6.1(3). If the taxpayer is requesting relief for penalties assessed on two or more tax periods, FTA criteria can apply to the earliest tax period, as long as the taxpayer meets the clean penalty history criteria for the three tax years prior to the earliest tax period.
17 Practitioner Priority Service: 866-860-4259 866-860-4259 FREE.
19 See IRM §20.1.5.4 for post-assessment abatement procedures, which state that the function responsible for the penalty assessment should decide whether the penalty should be abated.
20 See IRM §20.1.1.3.1 (11/25/11) for oral requests for penalty abatement.
21 The author requested information regarding first-time abatement, including the oral statement authority amount, under the Freedom of Information Act (FOIA); however, the IRS denied the request, citing several FOIA exemptions, including Sec. 6103(e)(7), which precludes releasing information that could potentially impair tax administration.
22 See IRM §§20.1.1.3.6.5 and .6.
24 Although the threshold amount is unpublished, the author has experienced FTA thresholds of less than $1,000 to be routinely allowed by the IRS without a written request.
26 IRS Advisory Council, 2011 Public Report, “Small Business/Self-Employed Subgroup Report,” at 73 (Nov. 16, 2011).
27 TIGTA Rep’t No. 2012-40-113.
28 A Taxpayer Advocate Service memo, “Interim Guidance on Penalty Relief Advocacy, and Using the Reasonable Cause Assistant (RCA),” dated Feb. 7, 2012 (Control No. TAS-13-0212-007), states that the TAS does not have delegated authority to make penalty abatement determinations under Delegation Order No. 13-2 (3/3/08). However, the memo explains, the delegated authorities do not preclude the TAS from making specific recommendations to the IRS to abate penalties.
29 TIGTA Rep’t No. 2012-40-113. The IRS agreed to RCA modifications and to provide training to its employees on using the RCA.
31 This letter adjusts the failure-to-deposit penalty. It states that the abatement action has been taken based solely on the fact that the taxpayer has a good history of timely filing and paying, that the abatement is a one-time consideration, and that any future penalty relief decisions will be made based on reasonable-cause criteria.
32 News Release IR-2012-4, IRS estimate for tax year 2006.
33 IRS Data Book, Table 17; historical data available here.
34 National Taxpayer Advocate, 2010 Annual Report to Congress, Most Serious Problem No. 14, “The IRS’s Over-Reliance on Its ‘Reasonable Cause Assistant’ Leads to Inaccurate Penalty Abatement Determinations,” at 202 (Dec. 31, 2010).
35 IRS Advisory Council, 2011 Public Report, “Small Business/Self-Employed Subgroup Report,” at 74–78.
Jim Buttonow is vice president of product development for Beyond415 in Greensboro, N.C., and is a former IRS large-case team audit coordinator. For more information about this article, contact Mr. Buttonow at jbuttonow@beyond415.com.

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