Wednesday, October 17, 2012

First Time Abatement for FTF and FTP Penalties (10/17/12)

TIGTA issued a report on the First Time Abate Penalty waiver of failure to file (FTF) and failure to pay penalties under Section 6651(a)(1) and (2).  TIGTA, Penalty Abatement Procedures Should be Applied Consistently to All Taxpayers and Should Encourage Volulntary Compliance, Treasury Inspector General for Tax Administration (Ref. No. 2012-40-113 9/19/12), here.
The FTF penalty is usually 5 percent of the unpaid taxes for each month or part of a month that a tax return is late.  This penalty will not exceed 25 percent of the unpaid taxes.  If a taxpayer files his or her tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.    
If a taxpayer does not pay all taxes owed by the due date, he or she will generally have to pay an FTP penalty of one-half of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid.  This penalty can be as much as 25 percent of the unpaid taxes.  The FTP penalty will continue to accrue after the initial assessment if the taxpayer fails to pay the total tax due when the tax return was due. 
The IRS can abate both penalties under certain circumstances.  Relief from these penalties is generally granted to taxpayers who show they exercised ordinary care and prudence, and failure to file or pay was due to reasonable cause and not due to willful neglect.  However, beginning in Calendar Year 2001, the IRS began granting penalty relief under an Administrative Waiver known as the First-Time Abate (FTA).  Using the FTA waiver, the IRS grants relief to taxpayers who receive an FTF or FTP penalty but have a compliant tax history for the prior three years.  The FTA waiver applies only to a single tax year.
For further background, see IRM  (11-25-2011), titled First Time Abate (FTA), here.
Here are the TIGTA's conclusions:
The IRS waives FTF and FTP penalties for some taxpayers who have demonstrated full compliance over the prior three years.  The purpose for granting the waiver, called a First-Time Abate (FTA), is to reward past tax compliance and promote future tax compliance.  However, most taxpayers with compliant tax histories are not offered and do not receive the FTA waiver.
TIGTA estimated that for Tax Year 2010, approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties did not receive penalty relief even though they qualified under FTA waiver criteria.  TIGTA estimated the unabated penalties totaled more than $181 million.  Further, the FTA waiver is not used to its full potential as a compliance tool because it is granted to taxpayers before they demonstrate full compliance by paying their current tax liability.  
Taxpayer requests for penalty abatements were not always processed accurately.  The IRS took immediate corrective action to address this issue. 
In addition, taxpayers who qualify for penalty relief based on reasonable cause may receive FTA waivers instead, which can negatively affect some taxpayers.  
TIGTA recommended that the FTA waiver be better used as a compliance tool by ensuring taxpayers are aware of their potential to receive the waiver based on their past compliance history.  Receipt of the waiver should be contingent upon taxpayers paying their current tax liability. 
TIGTA also recommended that a process be developed to address the negative impact to taxpayers who qualify for abatement of the FTF and FTP penalties based on reasonable cause, but are given FTA waivers instead. 
In their response to the report, IRS officials agreed with the recommendations and are taking appropriate corrective actions.  The IRS plans to study how best to use the FTA waiver as a compliance tool. It also plans to review the current process for application of an FTA waiver prior to reasonable cause and its impact on taxpayers who qualify for reasonable cause, but instead are given an FTA waiver.

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