First Time Abatement (FTA) Penalty Relief
The Internal Revenue Manual (IRM 20.1.1.3.3.2.1 (3-29-23) provides administrative abatement, termed First Time Abatement (FTA) of the following penalties:
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Failure to file (FTF) penalty under IRC 6651(a)(1), IRC 6698(a)(1) (Partnership returns), or IRC 6699(a)(1) (S Corporation returns),
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Failure to pay (FTP) penalty under IRC 6651(a)(2) and/or IRC 6651(a)(3), and
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Failure to deposit (FTD) penalty under IRC 6656 [details not covered in this material].
To be eligible for waiver of the penalty, the taxpayer:
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Must have filed the same return as the penalized return for the 3 years preceding the penalized tax period, unless there is no filing requirement for the applicable tax period or the tax modules* for the same return do not have return delinquency issues (non-filer), and
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If required to file the same return during the preceding 3 years, those returns for the 3 preceding years were processed by the IRS and DO NOT have ANY TYPE of unreversed penalties (except an Estimated Tax penalty) and no notice was issued showing the assessed penalty or penalties, and
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If required to file the same return during the preceding 3 years, modules
*for those returns have no penalties manually suppressed or reversed with a Penalty Reason Code for (a) first time abatement reasonable cause not used, (b) first time abatement reasonable cause used, or (c) Tolerance (used for FTD penalties).
*As explained in the IRM: a tax module is a record of tax data for a specific taxpayer covering one return for one tax period, and is identified by a TIN, Master File Tax Account Code (MFT) and tax period. Master File Tax (MFT) Codes identify the specific types of return/account and Transaction Codes (TC) identify the types of transactions posted to accounts. Each tax form is assigned a Master File Tax (MFT) Code, e.g., MFT 30 identifies most Form 1040 returns.
The taxpayer(s) must meet FTA criteria for the three years preceding the penalized tax period for returns required to be filed as a primary and secondary taxpayer, if applicable.
Example: If the filing status on the return of the penalized period is Married Filing Joint and the required returns in the preceding 3 years were not filed under the same primary SSN and with the same filing status and same primary and secondary SSNs, FTA criteria for both SSNs must be met.
Example: If the filing status of the return on the penalized period is other than Married Filing Joint and the taxpayer filed, or was required to file, as a secondary taxpayer during the preceding 3 years, FTA criteria must be met for the returns on which the taxpayer was reported, or was required to be reported, as the secondary taxpayer on a joint return.
Penalty relief under the FTA waiver only applies to a single tax period. If a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods. This abatement is NOT a once-in-a-lifetime waiver, however, since a taxpayer could be eligible for abatement every 4th year, provided that all FTA waiver criteria are met during the 3-year lookback period for the penalized tax period.
Penalty relief under the FTA waiver does not apply to the following:
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Returns with an event-based filing requirement, generally returns filed once or infrequently.
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Information reporting that is dependent on another filing, such as various forms that are attached.
Examples of some returns where penalty relief under the FTA waiver is NOT applicable include:
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Form 706, U.S. Estate Tax Return
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Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
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Form 990, Return of Organization Exempt from Income Tax
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Forms 1099 series information returns
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Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business
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Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
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Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner
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Form 5471
*, Information Return of U.S. Persons With Respect to Certain Foreign Corporations -
Form 5472
*, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
*Exception may apply - See IRM 20.1.9 International Penalties | Internal Revenue Service (irs.gov)
Per IRM 20.1.1.3, Criteria for Relief from Penalties, penalty relief under Administrative Waivers, including FTA, is to be considered and applied before reasonable cause. If FTA criteria are met, the FTA waiver will be applied before reasonable cause. The IRM tells IRS personnel to not provide relief under the FTA waiver if there is clear and convincing evidence that the taxpayer did in fact comply and is not subject to any penalties or if the penalty or penalties is/are the result of an IRS error. The IRS employee is to take appropriate corrective actions that will result in systemic reversal of the penalty or penalties.
The IRM goes on to say that taxpayers are not required to specifically request penalty relief under the FTA waiver to be eligible for the waiver. If one or more penalties eligible for relief under the FTA waiver remain after all account discrepancies have been corrected, and/or are being proposed in the course of an examination, abatement or suppression of the penalty or penalties should be made if all FTA criteria have been met.
If the taxpayer qualifies for the relief, a call to taxpayer services will usually trigger the relief. Tax professionals with appropriate Power of Attorney can call the Practitioner Priority Service at 866-860-4259 on behalf of a client to request FTA waiver, or contact ACS if the return is already in Collections. If the penalty has already been paid, file Form 843, Claim for Refund and Request for Abatement.