Uh-oh. You didn’t pay your taxes by the deadline. You’re facing late payment penalties – but, believe it or not, you may be able to convince the IRS to waive those penalties.
It’s not well publicized, but the IRS does have a First Time Penalty Abatement (FTA) Policy. The FTA only applies for a single tax year and can be requested for late payment or late filing of taxes.
To be eligible to request an FTA, you must meet three criteria – you must have no tax penalties for the three years prior to the FTA’s tax year (or you’ve not had to file taxes in the three prior years), you filed all the returns for the current year including any relevant extensions, and you have either paid all the current year’s taxes or have made arrangements to do so (such as through an installment plan).
You must have a plausible reason for being late with your taxes – “I forgot” may not fly with the IRS. The IRS Reasonable Cause Assistant (RCA) is an online tool to determine whether you will be granted penalty relief due to reasonable cause. Typical reasons include serious illness or death of a family member, natural disasters such as floods, fires, or hurricanes, and missing or stolen tax documents. The RCA is programmed to determine if you meet the FTA criteria above, such as having no penalties for the three years prior. If not, you may still qualify for the relief, but it will be classified as Reasonable Cause relief instead of First Time Abatement.
Incorrect advice from the IRS may also qualify you for administrative relief, but that relief should be requested through a statutory exception argument. FTA’s are for your mistakes – don’t use one up for a penalty that was ultimately caused by IRS mistakes. Statutory or regulatory exceptions that may qualify for penalty relief include military service in a presidentially declared combat zone and erroneous written or oral advice from the IRS or a tax professional. However, you must still show that you practiced ordinary business care and prudence in relying on the IRS advice, whether that advice was correct or not.
There are two ways to ask for an abatement. You may ask by phone using the contact information on the penalty notice, or you may send a letter to the IRS stating your claim.
The letter must include a reference to the penalty notice in question, the nature of the penalty, your reason for the abatement (along with supporting documents), and your contact information. Several websites offer a sample letter that you can adapt to your specific request.
If you do ask for an abatement by phone, it’s best to follow-up with a written letter to the IRS documenting the conversation.
In either case, you may need to supply documentation that backs up your claim – for example, if you claim a serious illness as the reason for filing or paying late, have copies of the medical records in hand to prove your case. Keep copies of all documentation that you supply to the IRS.
Since failure-to-pay penalties continue to accrue until the tax is paid, consider waiting until the tax is fully paid before you ask for a penalty abatement. As an alternative, you can pay the penalty upfront and then ask for a refund of the penalty by filing IRS Form 843, Claim for Refund and Request for Abatement.
If your FTA is not granted, you may be able to appeal the decision with the IRS Office of Appeals. Make sure you have all the records and evidence that you need to support your claim.
While the request is called a First Time Penalty Abatement, you aren’t limited to a single FTA request during your tax filing years. As long as you meet the three-year criteria and the other requirements listed above, you can ask for an FTA. And if you don’t, you could still qualify for relief due to Reasonable Cause or Statutory Exception.
It’s good to know that a penalty abatement may apply – but it’s best to not have to use it at all. Organize your tax documents throughout the year and be prepared to file as early as possible. You may believe you have a valid reason for paying your taxes late, but the IRS might not agree.
Simply failing to pay a tax penalty that you owe could hurt your credit. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.