In 2001, the IRS implemented its first-time penalty abatement program to reward taxpayers who had a good compliance history.
The FTA program removes certain late-payment and late-filing penalties for individuals, businesses and employers who have a clean compliance history.
Since its inception in 2001, many taxpayers haven’t taken advantage of this waiver. In 2012, the IRS’s watchdog, the Treasury Inspector General for Tax Administration, reported that only 8 percent of individual taxpayers requested and received the FTA waiver. That means that more than a million taxpayers miss out on this tax penalty relief provision each year.
The IRS has taken steps to provide better FTA accessibility. In 2015, the service began accepting FTA requests by phone regardless of the penalty amount, making FTA more accessible for people who needed it. With a phone call, taxpayers with no penalties in the prior three years could get failure to file, failure to pay, or failure to deposit penalties waived for a single tax year or period.
Then the service made it even easier to get FTA. The IRS set up a penalty assistance hotline and started including a special penalty leaflet in IRS notices that explains taxpayers’ right to request FTA.
TIGTA and the National Taxpayer Advocate have been vocal in reminding the IRS about its responsibilities in administering penalties and its IRS Policy Statement 20-1. This statement explains that the IRS should use penalties to promote voluntary compliance, and that the IRS should administer penalties impartially and consistently.
With most eligible taxpayers not taking advantage of FTA, both oversight organizations argued that the IRS should look into solutions to improve taxpayers’ use of the waiver.
One recommendation was that the IRS should automatically grant FTA if the taxpayer’s circumstances fit.
Could automatic FTA happen?
Here’s how it could work.
If a taxpayer has a clean compliance history for the past three years, IRS systems could automatically abate the penalty and notify the taxpayer with a notice. The notice could state, as it does today when a taxpayer has requested and received FTA, that the IRS waived the penalties because of the taxpayer’s clean compliance history, and that FTA is a one-time opportunity.
According to a Feb. 8, 2018, IRS Chief Counsel Technical Assistance memo, the IRS is considering automating FTA for all taxpayers. The memo states that 1.35 million additional taxpayers would receive FTA under the new IRS proposal to automatically abate penalties when a taxpayer meets FTA rules.
With this memo, IRS attorneys have cleared the path for the IRS to automate the FTA waiver.
Work for tax pros
Tax professionals will need to educate clients about this new development.
Many tax pros are unaware of the FTA rules. If the IRS implements this program, tax professionals will need to explain why the IRS allowed the waiver—that is, the rules for FTA.
Clients, however, shouldn’t believe that this waiver comes easily. Tax professionals should explain that it applies to certain failure to pay and failure to file penalties, but never for the estimated tax penalty or accuracy penalties related to return errors.
Tax professionals should rely first on valid reasonable cause arguments
Traditional arguments such as an IRS error, tax pro or software reliance, hardships for late payment, and other personal circumstances outside of the taxpayer’s control should always be the first penalty abatement argument.
Why? If the IRS grants reasonable cause penalty abatement, the taxpayer can still use FTA in the future if needed.
One word of caution: If tax pros are contacting the IRS, especially by phone, to ask for reasonable cause relief, make sure the IRS has correctly classified the relief as due to reasonable cause—not FTA.
IRS representatives use an automated penalty abatement tool that looks to FTA first before applying reasonable cause. If tax pros depend on the IRS order of operations, their clients could be precluded from using FTA in the future when they really need it.
Time will tell if the IRS implements automatic FTA. If the IRS does, 1.35 million individuals will get unexpected penalty relief.
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