Beginning 2001 IRS started granting First Time Abate (FTA) waiver to taxpayers who have compliant history for prior three years. The purpose for granting the waiver is to reward past tax compliance and promote future tax compliance. This waiver applies to single tax year. However, the relief is granted only if taxpayer requests for relief. More details can be found in Internal Revenue Manual-220.127.116.11.6.1.
The Treasury Inspector General for Tax Administration released a report on September 19, 2012 Reference number 2012-40-113 indicating not all taxpayers with compliant tax histories received the First-Time Abate Waiver.
Based on sample results of Tax Year 2010 taxpayer accounts, TIGTA estimated that approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties did not receive penalty relief even though they qualified under FTA criteria. TIGTA also estimated the unabated penalties totaled more than $181 million (approximately $67 million in FTF and $114.5 million in FTP).
A Taxpayer is required to file tax return and pay tax by the due date of the return. In case of failure to file (FTF) and failure to pay (FTP) penalties are imposed under IRC 6651.
Late filing penalty is 5 % of the tax due amount for each month or part of the month the return is late, up to a maximum of 25% IRC 6651(a)(1). Failure to pay penalty is .5% of the tax due amount for each month or part of the month during which such failure continues, up to a maximum of 25%. IRC 6651 (a)(2).
The IRS has the authority to waive these penalties under certain circumstances. As a general rule, taxpayer can avoid such penalties by showing that the failure is due to reasonable cause, not due to willful neglect and the taxpayer exercised ordinary business care and prudence. Regulation §301.6651-1(c )(1).
Taxpayers may request abatement of penalties due to reasonable cause either orally or in writing.
However, TIGTA reported that taxpayer could be burdened by current IRS procedures. IRS procedures state that taxpayers who qualify for both an FTA waiver and penalty relief for reasonable cause are to be granted FTA waivers instead of abatements for reasonable cause. This was done by the IRS to simplify the processing of abatement requests. This can harm taxpayers as it may prevent them from being granted the FTA waiver in future years.
The TIGTA report provides the following example:
A taxpayer with a clean compliance history asks to have his FTF penalty abated in Tax Year 2010 for reasonable cause (serious illness). The IRS would first consider the FTA waiver and the taxpayer would be granted penalty relief under FTA criteria. The following year, the taxpayer is late paying his Tax Year 2011 taxes, but did not have reasonable cause. He will be assessed an FTP penalty, which could not be waived because he had been granted an FTA waiver for the prior tax year. Had the taxpayer been granted reasonable cause for late payment for Tax Year 2010, the taxpayer would qualify for an FTA waiver for the FTP penalty for Tax Year 2011.
TIGTA recommended that IRS should develop a process to address the above negative impact to taxpayers.
TIGTA also noted that penalty waivers should not be granted only to taxpayers or preparers with knowledge of IRS processes. The IRS is responsible for administering penalty statutes and regulations in a manner that is fair and impartial to both the Government and the taxpayer. If the IRS does not administer penalties uniformly, the taxpayer’s confidence in the tax system can be affected.
In its recommendation, TIGTA states that the IRS can use the FTA waiver as a compliance tool by ensuring taxpayers are aware of their potential to receive FTA waiver based on their past compliance history. Although IRS agreed to identify ways to increase taxpayer awareness, there are millions of taxpayers out there who are not aware of their potential to receive FTA waiver.