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Penalty abatement, part 2: what is the first-time penalty waiver?

A few weeks ago, we began a two-part post about tax penalty abatement. As we noted in our January 23 post, the IRS may allow a reduction or discharge of a penalty when you can show reasonable cause – such as financial hardship – for your lack of tax compliance.

Many taxpayers do not realize, however, that there may be very specific type of penalty abatement available: the first-time abatement (FTA) penalty waiver. In this part of the post, we will address the question of what the FTA is and how to request it.

 

Though the FTA has been around for well over a decade, it is not as well known as it should be. But as the Journal of Accountancy has noted, this type of waiver is potentially available to both individuals and businesses that have run into compliance problems on their taxes for the first time.

To be sure, there are certain criteria to be met in order to qualify. You have to show that your taxes have been filed your taxes or obtained a valid extension of the time to file. You must also have either paid your taxes or resolved the payment obligation in some way, such as through an installment agreement.

In addition, you must have not have had any tax penalties in the preceding three years. In practice, this means that no significant penalties were assessed against you during that time period on the tax return for which you are seeking penalty abatement. An experienced tax attorney can help you determine what penalties are considered “significant” in this context.

A tax attorney can also help you make your request for penalty abatement based on the FTA or some other rationale. There several options for initiating the request, ranging from a telephone call to a written request. It is also possible to use electronic services for this purpose.

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