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IRS’ first-time penalty abatement administrative waiver (FTA)

12 years ago the IRS created the first-time penalty abatement administrative waiver (FTA), which allows typically compliant individual and business taxpayers to request abatement, or removal, of certain penalties that the IRS has assessed against them for the first time. In effect, the IRS rewards typically compliant taxpayers with one-time penalty amnesty, which can save the taxpayer penalty dollars.

Earlier this month the IRS further revised the FTA process by further requiring taxpayers to be current with current year filing and tax payments.

Despite the advantages of this IRS waiver, few taxpayers who qualify for FTA request it.  The problem is twofold: Most taxpayers and tax professionals do not know FTA exists, and IRS representatives often incorrectly disallow an FTA when using the IRS’s faulty automated decision tool to make penalty determinations. In effect, FTA is hidden to most taxpayers and tax practitioners, who may not be aware of how it works, how to request it, or even its existence.

In 2001, the IRS established FTA to help administer the abatement of penalties consistently and fairly, reward past compliance, and promote future compliance. This administrative penalty waiver allows a first-time noncompliant taxpayer to request abatement of certain penalties for a single tax period—one tax year for individual and business income taxes and one quarter for payroll taxes.

FTA applies only to certain penalties and certain returns filed. First, determine whether FTA applies to the client’s situation:

  • Individual taxpayers can request an FTA for failure-to-file and failure-to-pay penalties. Estate and gift tax returns do not qualify for FTA waivers.
  • Business and payroll taxpayers can request an FTA for failure-to-file, failure-to-pay, and/or failure-to-deposit penalties. The IRS is not explicit in its Internal Revenue Manual (IRM), but in practice, the IRS has granted FTAs for S corporation and partnership late-filing penalties.
  • For individual and business taxpayers, the estimated tax and accuracy-related penalties cannot be waived under FTA.