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File Your Taxes Late or Forget to Make Your Tax Payment? Use the First-Time Penalty Abatement.

If you’ve ever received correspondence from a tax agency (IRS, FTB or other), you probably feel instantly nervous before you open the envelope. I know I do! Even though I know it’s just a notice to renew my PTIN or something that’s related to my tax returns. If the notice has a balance due, get in touch with your tax preparer first to make sure it’s correct.  If there are penalties, you may have an option to get out of paying them.  It’s a little-known fact that there are options for taxpayers to get out of paying some tax penalties. The First-Time Penalty Abatement is available to taxpayers for failing to file a tax return, failing to pay your taxes on time, or failure to deposit taxes when due.

The First-Time Penalty Abatement does not apply to other penalties, such as accuracy-related penalties. It can only apply to 1 year. Generally, the first year if you have multiple years with penalties.  The idea behind the first-time penalty abatement procedure is that if you have a clean tax history for the past 3 years, you are granted a mistake without getting penalized. We’re all human, mistakes happen. At least this abatement allows taxpayers some relief, in some cases.

To Qualify for the First-Time Abatement, There Are 3 Criteria the Taxpayer Must Meet:

  1. Filing Compliance – The taxpayer must have filed all required returns, with no outstanding request for a return from the IRS.
  2. Payment Compliance – The taxpayer must have paid all taxes owed or currently be on a payment plan.
  3. Clean Penalty History – The taxpayer must have no tax penalties for the previous 3 years (with exception of an estimated tax penalty).

If the taxpayer has met these 3 criteria, they should be able to get penalty relief. Even if they have requested relief before, if it was more than 3 years before the current request, they’re still eligible for relief.  I remember this as “If you’re clean for at least 3 years, you can be dirty and receive a penalty relief”.

Why It’s Important To Discuss the First-Time Penalty Abatement:

As a tax practitioner, I find that we’re more successful in getting penalty relief than if a taxpayer attempts this on their own.  Tax preparers can get a Power of Attorney form signed, call into the Practitioner Priority Service Center, and request an abatement. A request for a First-Time Penalty Abatement can also be sent with a letter and the required documentation in response to a notice that is received.  Written documentation is the preferred method for the IRS, however, I find that making the call with your tax preparer is most effective.

For example, I had a client who had late filing penalties for an S-Corporation during his first year of business. He used a prior preparer who had filed his LLC as a single member LLC (disregarded entity) on his Schedule-C as a sole-proprietor when the LLC had already filed an S-Corporation election. The S-Corporation election was effective the prior year, so an S-Corporation return needed to be filed since it hadn’t been filed we had to correct the filing. We filed the returns late, corrected the individual tax return, and requested a first-time penalty abatement over the phone, they accepted the abatement with no problem.

I also had another client who normally files a tax filing extension, their previous tax preparer didn’t file the extension, and this client came to us.  We completed his 2014 tax returns and we received the notice for late filing with a $12,000 penalty. We were able to get their tax penalty abated using the first-time penalty abatement and explain a ‘reasonable cause’ or ‘ordinary care and prudence’ (another abatement method) for the extension being missed because he generally files the extension.

Just because the notice has a penalty, doesn’t mean you’re always required to pay it. Keep your hard-earned money and don’t just hand it over to the IRS!

If you receive a notice with a penalty, contact us ASAP! Find out if you can use the First-Time Penalty Abatement. We can request an abatement from the tax agency that sent you the notice, even if you owe the tax. We’ll review the notice, respond accordingly and confirm whether you qualify for either abatement method above.

 

Written by Michael Lund

Michael Lund is an Enrolled Agent at DePauw Johnson. He provides services to his clients in the following areas: Individual income tax planning & preparation, business financial accounting, analytics, growth strategies and tax preparation. He obtained a degree in Business Administration from CSU San Marcos, with an option in Accounting. He was hired at DePauw Johnson where he gained his experience from working closely with Andy DePauw & Jeff Johnson; who combined have over 35 years of experience. Becoming his own business owner has always been in his vision, and his prior work experience with his father has directly translated to his clients, and fulfilling their needs. When not in the office, he loves spending time with his daughter Gracen and wife Amanda. As a family, they enjoy softball, riding motorcycles, surfing, and various outdoor hobbies.

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