Penalty Abatement for First-Time Penalties: The Ultimate Guide

It can happen to the best of us. You are always diligent with your taxes, almost obsessive. Until that one time you let up for whatever reason, and that slight oversight causes you to miss the filing date or skip sending in your taxes. 

Well, there is a first time for everyone. 

Unfortunately, such seemingly minor oversights with your taxes can cost you and affect you for a long time. 

The IRS begins penalizing you from the filing deadline or tax payment date. And the penalties and interest can be steep enough to grow your tax account balance significantly. 

So What Now?

Penalties and interest applied to late taxes and returns make it harder for you to get out of debt. Fortunately, the IRS will, at times, remove some penalties. This minimizes the size of your tax debt and makes it slightly more manageable.

This process is called penalty abatement, penalty waiver, or penalty relief. Most taxpayers are unaware of this option and how it can lower their balances. 

At the Cumberland Law Group, we advise and help our clients with resolution strategies like penalty abatement, which significantly helps ease their tax burden. 

But as always, there is a catch: the IRS will only remove penalties from your tax bill if you make the request. 

Also, there are different circumstances in which the IRS considers penalty abatement. Lucky for you, if you are a first-time offender, it will be easier for you to get your penalties waived than it would be for a repeat offender. 

A good compliance history helps as well. You are considered compliant if:

• You had filed the same tax type for the past three consecutive years before the tax year in which you received the penalty

• You dint receive any penalties in the three years prior to when you are requesting an abatement

Similarly, penalty abatements are easier to get if:

• You can show reasonable cause for incurring the penalties
• Your penalties are a direct result of erroneous advice from an IRS agent

Penalty abatement can apply to most penalties the IRS has imposed on your account.  

These include the following:

• Failure to File: this penalty kicks in when you fail to file your returns or file past the deadline. 
• Failure to pay penalty applies when you file your returns but fail to make the payment. 
• Failure to deposit penalty applies to employers who don’t deposit their payroll taxes on time. 

If any of these penalties are charged to your account, you can request a penalty abatement regardless of the penalty amounts. 

There are two outright exemptions, however:

• You cannot apply for a penalty waiver for penalties resulting from tax fraud or evasion
• There are no waiver considerations for the trust fund recovery penalty. With a good tax attorney, you can appeal this if you can show that you shouldn’t have incurred it, to begin with. 

How Much Are IRS Penalties and Interest?

It depends. 

The penalty charged to your account will be reflective of your liability. The IRS imposes a percentage of what you owe as a penalty. This includes late filing, failure to pay, and failure to deposit. As a result, what one person owes can be dramatically higher or lower than what another owes. 

Case in point: the failure to pay penalty is 5% to a maximum of 25% on the tax due. Therefore, person A with a liability of $20,000 charged at 15%  will owe a higher amount than person B, owing $20,000, at 6%. 

Besides penalties, there is an interest charged on tax liabilities.

When the IRS assesses a penalty against you, the penalty gets added to your tax debt. When you have unpaid taxes, interest accrues on the outstanding amount. 

And the IRS is strict about this, as it begins applying the interest on the return, payment, or deposit deadline. It also assesses interest on penalties. This starts on the day a penalty was charged to your account, and it compounds, meaning your interest accrues interest. Again, this interest is not standard and is adjusted quarterly in line with the Federal interest rate. 

With this in mind, you can only imagine how quickly your tax bill can escalate and how easy it is to be buried in tax debt if you don’t explore resolutions swiftly. 

The good news is (finally) that the IRS will remove the interest associated with penalties if you qualify for a penalty abatement. Unfortunately, this is as good as it gets, and you can’t get any other interest waived unless under exceptional circumstances. 

These are:

• When your tax assessment changes
• If the charged interest was assessed erroneously

What Is A First-Time Penalty Abatement?

We have looked at penalty abatements and what they are, as well as their eligibility criteria. 

But what is a first-time penalty abatement? 

A first-time penalty abatement is when the IRS extends relief to taxpayers because it’s the first time they accrue a penalty. 

In fact, you don’t need to convince the IRS of how certain circumstances caused you to miss deadlines. 

As long as you meet a few requirements, you can simply reach out to the IRS, let them know this is your first penalty, and they will waive it. 

The first-time penalty abatement is also known as an administrative penalty waiver. You can request first-time abatement on penalties accrued for the following:

• Failure to pay on time
• Failure to file
• Failure by employers to remit payroll taxes

Nonetheless, you must show you are compliant with the IRS. The compliance rules are as follows:

You had filed the same tax type for the past three consecutive years before the tax year in which you received the penalty

If, for example, you are seeking relief for late filing in 2022, you must have filed three years prior, that is, 2021, 2020, and 2019. 

In the same vein, if you are a business owner and your business wasn’t in operation in 2019, then 2020 and 2021 returns will suffice. The three-year rule will not apply because you were not in business. 

You dint receive any penalties in the three years prior

You also need to show that you dint incur any penalties three years prior to your application for an abatement. You still meet this requirement if you had a penalty removed for other reasons besides a first-time penalty abatement.

You are current on all your filings or have a late filing extension

You must file all the required returns when you request a first penalty abatement. You must prove that you sought an extension if you haven’t filed your latest rerun. 

You have an arrangement with the IRS to settle outstanding taxes, besides return with the penalties I question

The IRS can grant relief if the tax related to the penalties have not been settled. However, it won’t give relief if you have other outstanding taxes. 

Suppose you are applying for an abatement for 2022 taxes but haven’t settled your 2021 taxes. You cannot get relief until you either have a payment plan for the outstanding liability or pay it in full. 

For example, if you have a tax debt from a previous year, you can go ahead and apply for an abatement. However, even if you meet the criteria and get approved, the last year’s tax and the accruing penalties and interest still have to be paid. And the bill can run quite high. 

To be on the safe side, make arrangements for outstanding liabilities or settle them before applying for an abatement. 

How to Request a First-Time Penalty Abatement from the IRS

Typically, you can go about this in two ways:

• You can file a penalty abatement after the IRS has assessed a penalty. This is done via a penalty abatement letter, calling the IRS, or through your tax attorney.
• After you have paid the penalty, you can request a refund by filing Form 843. You must file this claim within three years of the return’s due date or two years of paying the penalty. 

Form 843 will require information about the return associated with the penalties and the penalty amount. You will also need to fill in the type of tax, the tax period, and the type of return. 

In section 5a, you need to tick the box that says you are applying for an abatement for a reasonable cause or other reasons that the law allows for. 

You can then write an explanation in section 7. 

Now, for a first-time penalty abatement relief, it’s allowed to simply write that this is your first penalty (if it is) and that you are requesting an abatement. Conversely, note this down in this section if you are applying with another valid reason. 

If you apply with a reasonable cause but at the same time qualify for first-time abatement, the IRS will give you first-time relief. But what does the IRS consider reasonable cause?

Reasonable Causes for IRS Penalty Abatement

Reasonable cause is when you had an understandable reason for filing late or not paying your taxes when they fell due. You can file one for late filing, depositing late, delayed payments, and in some cases, for accuracy-related penalties. Generally, the conditions of a reasonable cause revolve around life circumstances that are outside your control. 

To qualify, you must show that you exercised due care and prudence and that your inactions were not a result of recklessness or negligence. 

Here are some scenarios the IRS would categorize as reasonable cause:

• Acts of nature: earthquakes, wildfires, tornadoes, hurricanes, floods, and other acts of nature that might have caused you to miss filing or payment deadlines
• The taxpayer couldn’t access the records they needed for the filing due to factors beyond their control
• The absence, death, or illness of the taxpayer or a member of their immediate family that hindered them from filing, paying, or making the tax deposits
• IRS systems issue that caused a deposit or return to be processed after the deadline
• Any other reasons that can be seen to be out of the taxpayer’s control

The following scenarios don’t qualify as reasonable cause:

• Your tax professional paid or filed late
• You are not clear on tax law
• You made a mistake
• You dint have the funds to make the payment

It helps to talk to a tax attorney to help you outline what would and would not qualify as reasonable cause. 

How To Apply For a Penalty Relief Based on Reasonable Cause 

You can make your request by filling in form 843 and submitting it alongside all other documents that help support your plea. 

While assessing your request, the IRS will look at the following:

• The events that happened and when
• The facts and circumstances surrounding your reasons for not filing or  paying taxes
• Your situation vis a vis how it caused your inability to file or pay
• The actions you took and their timeliness once the prohibitive circumstances changed
• For estate, corporate and trust returns, the IRS considers the person mandated to file or pay 

You can present different types of documents to prove your claims and build a water-tight case. These include the following:

• Hospital records if the reasonable cause revolved around the illness of the taxpayer or immediate family member
• Court records
• Death certificate if you failed to file or pay due to a death in the family
• Documentation of natural disasters can include insurance claims 
• Police records

Ideally, you should attach the documentation you have to Form 843. If you request a penalty abatement over the phone, the IRS agent you speak to will direct you to send the documents. 

Penalty Abatement Appeal

You can request an Appeals Conference or hearing if your appeal is rejected. You can represent yourself, or appoint someone like a tax attorney to represent you. 

Such appeals should be requested within 30 days of receiving the rejection letter, so refer to it for a definitive deadline. 

During the appeal, the IRS’s position will be reviewed independently. You might be called upon to provide additional documentation or join a conference to discuss your case. 

Once a decision is made, the basis will be explained to you. 

Protect Your Interests

For many taxpayers, penalty abatements are unfamiliar territory. In fact, chances are that you just found out such relief exists. As such, putting together a solid case is likely to be an uphill task.

The best way to protect your interest when you have an IRS tax issue is to get a qualified, experienced tax attorney on board. Call Cumberland Law Group for a free consultation today.