First Time Penalty Abatement: How to Get IRS Fees Removed

Navigating income taxes, especially if you go it alone, can feel very intimidating. About 1 in 4 Americans don’t feel prepared to file. Taxpayers worry about making mistakes as returns become more complicated, never mind worrying about facing a potentially large (and unaffordable) tax bill. Late payments or unfiled returns can also lead to intense penalties. 

If you receive a penalty notice from the IRS after you’ve filed taxes (or because you haven’t yet filed), don’t panic. The agency offers a helpful program called First Time Penalty Abatement (FTA). This administrative waiver can remove or reduce penalties for a specific tax year, giving you a fresh start. 

This article will walk you through what FTA is, who qualifies, how to request it, and other options you may have for penalty relief. Or to get help now, contact us at Seattle Legal Services to set up a consultation and talk about options.

What is first-time penalty abatement?

First-time penalty abatement (FTA) is an administrative waiver provided by the IRS to remove or reduce penalties. It gives you a one-time break if you have a good record of tax compliance but made a mistake in one single tax year. That doesn’t mean that you’ve never incurred a penalty before – typically, you qualify for first-time abatement if you haven’t had a penalty in the last three years.

The IRS assesses penalties to encourage voluntary compliance with tax laws, but recognizes that honest mistakes happen. The FTA program primarily applies to these common penalties:

• Failure to file penalty: The IRS levies this penalty if you don’t file your return by the due date. It’s 5% of the unpaid tax for each month or part of the month that a return is late, capped at 25%.
• Failure to pay penalty: This penalty applies if you don’t pay the tax shown on your return by the due date. It’s usually 0.5% to 1% of the unpaid taxes for each month or part of a month the taxes remain unpaid, also capped at 25%.
• Failure to deposit penalty: This penalty applies to businesses that don’t make timely or correct deposits of employment taxes.

A caveat: If you’re requesting relief for a failure to pay penalty, the penalty will continue accruing until you pay your tax liability in full, even if the IRS accepts your FTA request. The abatement only removes the penalties up to the point of the request; you’ll still need to pay the remaining penalty that accrues after the request is made. However, that penalty drops to 0.25% per month if you set up an installment agreement. 

Who qualifies for first-time penalty abatement?

Several factors determine your eligibility for FTA. 

• A clean compliance history: You must have filed all required tax returns for the previous three tax years, and you must not have received any penalties (other than an estimated tax penalty) during that period. Any penalties removed for reasons other than FTA won’t count against you.
• Current filings: The penalty you’re seeking to abate must be related to a tax year for which you’ve filed all required tax returns or have filed an extension.
• Payment status: You must have paid, or arranged to pay, any tax due on your returns. While you can request FTA even if you have an outstanding tax balance, it’s best to pay your balance in full to prevent the Failure to Pay penalty from growing.

Since this concept may be a tad abstract, let’s look at a few examples.

Example 1: Lindsay didn’t file her 2023 tax return on time. But she had filed and paid her 2020, 2021, and 2022 taxes on time and had a clean tax history. Because this tardiness is her first penalty in three consecutive years, she’s a candidate for FTA.

Example 2: Joshua was assessed a Failure to Pay penalty for his 2021 tax return. He also had received a penalty for his 2020 return, which the IRS removed for a valid reason. He had filed his 2018 and 2019 returns on time, but wouldn’t be eligible for FTA because he had a prior penalty in the past three years (in 2020). 

First time abatement vs. reasonable cause

Let’s take a moment to review the difference between FTA and a reasonable cause abatement, because they’re not the same thing. While FTA is a one-time “get out of jail free” card, reasonable cause offers a broader form of relief that the IRS can grant if you can prove you acted with “ordinary business care and prudence” but still couldn’t meet your tax obligations.

Many factors that fall under the reasonable cause abatement are beyond your control and might include:

• Natural disaster or other casualty: A fire, flood, or severe storm that destroyed your records or prevented you from filing.
• Serious illness or incapacitation: A severe illness, or the death or serious illness of an immediate family member.
• Unavoidable absence: Being out of the country or in a situation where it was impossible to file or pay on time.
• Official IRS error or bad advice: If the IRS provided incorrect written advice that led to the penalty.
• Issues with records: The destruction or inaccessibility of required business records.

The IRS will generally not grant a reasonable cause abatement unless you can prove that an unforeseen event or circumstance beyond your control prevented you from having the funds to pay your taxes on time.

Note that if you apply for reasonable cause penalty relief but the IRS sees that you qualify for first-time abatement, they will process the penalty removal as FTA. That means it will disrupt your ability to get first-time penalty relief for the next few years. 

How do I request a first-time penalty abatement?

The process for requesting FTA is pretty straightforward. You can make the request in a few ways.

• Call. The quickest and easiest way is often to call the toll-free number on the IRS penalty notice you received. A representative can review your account to see if you qualify.
• Send a letter. You can send a written request to the IRS. Include your name, Social Security Number or taxpayer ID, the tax year, and the penalty you want removed, and a brief statement requesting FTA.
• Use Form 843. While a phone call or letter can resolve many penalty issues, you may choose to file IRS Form 843, “Claim for Refund and Request for Abatement.” This form works for various abatement requests, including those for penalties and interest. 

What happens after I request FTA?

Once the IRS receives your request, someone will review your account to determine your eligibility. The IRS may even automatically review your account for FTA eligibility when you contact them about a penalty, even if you’re requesting a different type of relief.

If approved, the IRS will remove the penalty from your account, along with any related interest. If the IRS denies your request, you have the right to appeal its decision. In such cases, we recommend seeking professional assistance from a qualified tax professional or attorney.

Frequently asked questions (FAQs)

Whatever you do, don’t ignore an IRS penalty notice. The worst thing you can do… is nothing. Even if you’re ineligible for FTA, you may have a valid reason for a reasonable cause abatement, and it’s always worth a try. Still have questions? Then, check out these answers.

What’s the best way to apply for FTA?

The quickest way to apply for FTA is by calling the IRS. The administration is currently backlogged, and a written request takes longer to review, which means financial penalties will keep accruing. 

Is it okay to delay responding to a penalty notice?

Don’t procrastinate. Act quickly to request penalty abatement as soon as possible after receiving your penalty notice. 

What else should I do to improve my chances of qualifying for FTA?

Always keep good records of your tax filings and payments. Holding onto your records will make the process much smoother if you ever do need to request FTA. Also, file your taxes (or extensions) on time. If you struggle to prepare your tax return, consider outsourcing to a tax professional.

What happens if the IRS denies my FTA?

You can appeal the decision if you think the agency made a mistake and you still qualify. You must file your appeal within 30 days of receiving the rejection.

Can I apply for FTA myself?

While it’s possible to handle an FTA request yourself, a qualified tax professional or tax attorney can help you navigate the process, determine your eligibility for different types of relief, and handle communication with the IRS. These tax pros can also assist if your request is denied and you need to file an appeal. 

While managing IRS penalties can cause stress, understanding your options and the process for FTA will empower you to confidently address the issue and focus on your financial future.

Get Help With IRS Penalties Now

Received a penalty notice from the IRS? Don’t wait to see what happens next. Call Seattle Legal Services at 206-536-3152 or contact us online to learn about your options.