A taxpayer who falls behind on their payments to the IRS owes more than back taxes. Interest and penalties pile up, adding to their debt. Frightened and overwhelmed, clients often turn to a CPA, Enrolled Agent, or other tax resolution specialist for help. The IRS offers First Time Abatements to reduce the load, but securing one is difficult, and success rates are low. In 2019, only 12% of Failure to File (FTF) and Failure to Pay (FTP) abatement applications were accepted, along with only 9% of requests to abate other individual penalties. You’ll need skill, savvy, and a great First Time Penalty Abatement letter to secure approval for your next tax resolution client. We have everything you need and a downloadable template to get you started.
What is a First-Time Abatement?
First Time Penalty Abatement (FTA) is IRS relief designed for taxpayers who have otherwise complied with their tax obligations and have not faced penalties for the preceding three tax years. The purpose of an FTA is to reward good tax compliance behavior and provide relief from penalties due to unusual circumstances. It allows taxpayers to remove certain penalties from their accounts for a single tax period.
Who Qualifies for a First-Time Abatement?
The taxpayer’s compliance history primarily determines eligibility for an IRS penalty abatement. To qualify, the taxpayer must have all required returns filed or extensions requested and must not have had any penalties in the past three years on the same tax returns. Qualifying clients could include a taxpayer who has consistently filed and paid on time but faces a penalty due to a mistake or unusual circumstance or a business that has maintained proper filing and payment schedules but encountered a single instance of delay due to unforeseen disruptions.
Qualify for FTA | DO NOT Qualify for FTA |
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Types of Penalties Eligible for Abatement
The types of penalties eligible for a First Time Abatement include:
- Failure to File (FTF): One of the most common penalties, FTF, is normally 5% of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25% of the unpaid taxes.
- Failure to Pay (FTP): FTP penalties are generally 0.5% per month of unpaid taxes. The penalty applies for each month or part of a month, and the taxes remain unpaid and start accruing the day after taxes are due. These penalties can build up to as much as 25% of the unpaid taxes.
- Failure to Deposit (FTD): Businesses with employees must file IRS Form 941 (Employer’s Quarterly Federal Tax Return) to report income taxes, Social Security tax, and Medicare tax withheld from employees’ paychecks as well as the employer portion. Failure to deposit penalties of up to 15% are incurred when the required deposit is late, or tax liabilities are underreported. Under certain conditions, FTD penalties may qualify for First Time Abatement.
Requirements for First-Time Abatement
First Time Abatement is reserved for those who have consistently complied with tax laws but may have come up against extraordinary circumstances. It is both a reward for past compliance and an incentive for continued adherence to tax obligations. As such, qualifications for consideration are rigid:
- Filing Compliance: All required returns must have been filed or a valid extension must be in place.
- Payment Compliance: All required payments or deposits must be up to date, or arrangements (like an installment agreement) must be in place if the taxpayer cannot pay in full.
- Clean Penalty History: No significant penalties can have accrued for the three years preceding the tax year in which the penalty occurred.
Requesting a First-Time Penalty Abatement
Initially, you can attempt to secure a First Time Abatement for your client with a direct conversation. Starting with a phone call opens the possibility of a quick resolution while allowing the possibility of following up with detailed written correspondence if needed. You can begin the process by calling the IRS through the Practitioner Priority Service (PPS) or the Automated Collections System (ACS) to request an FTA verbally.
*****Note that a verbal denial does not preclude the possibility of another request by phone or in writing. If your verbal request is denied, or if you prefer to start with a written request, you have two choices: You can use IRS Form 843 or draft a detailed explanatory First Time Penalty Abatement letter. We recommend the latter for a more thorough presentation of the case.
Craft a Great First Time Penalty Abatement Letter
Crafting a First Time Penalty Abatement letter for your client involves clearly presenting facts and a structured argument supporting the abatement request. Written requests should be concise and are typically made only once to avoid redundancy. Here’s a step-by-step guide:
- Review Compliance History: Ensure your client meets the eligibility criteria, including filing and payment compliance and a clean penalty history. With these, your FTA request will be allowed. Instead, you should full pay or consider an offer in compromise (OIC) vs installment agreement (IA) or even a transition to currently not collectible (CNC) status.
- Prepare the Documentation: Gather any documentation that will support your claim of compliance and the reasons for the penalty occurrence.
- Write the Request Letter: Craft a detailed letter to the IRS that includes:
- The taxpayer’s identification information (name, address, Social Security number, or tax ID number).
- A statement requesting the First Time Abatement.
- An explanation of each penalty notice received, including the date and the type of penalty.
- A detailed compliance history proving the taxpayer’s eligibility.
- A concise argument stating the reason for the penalty and why the reduction is justified.
- Double-Check Your Work: Proofread your letter for spelling and grammar errors. Even better, ask a colleague to look it over. Make sure that it’s factual and devoid of excuses or emotion. Ensure that all necessary documentation has been obtained, verified, and attached.
- Submit the Request: Send the request through the appropriate IRS channel. Save time and effort with tax resolution software.
The IRS Solutions team has written and submitted hundreds of successful first-time penalty abatement letters. This template reflects our winning formula and best practices, and we’re happy to offer it for you to download and use.
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ABOUT THE AUTHOR
David Stone
Helping Accountants Save Time at IRS Solutions
David Stone, an enrolled agent and founder of IRS Solutions, leverages his comprehensive IRS experience to empower tax professionals in navigating complex tax disputes. A proud alumnus of California State University Northridge, David’s journey began as a Revenue Officer at the IRS, where he embraced diverse roles, including working the lien desk and becoming an Offer in Compromise specialist. His transition from the IRS to founding IRS Solutions Valencia was driven by a vision to simplify tax resolution. David’s ingenuity led to the creation of IRS Solutions Software, embodying his commitment to providing effective tools and sharing his extensive knowledge with professionals in the field. As the bestselling author of “Tax Breaks for the Rich and Famous” and “The Great Tax Escape,” David’s expertise continues to guide business owners and accountants alike.
