__________ Avoiding IRS Penalties
Order more Information



Planning, Review & Preparation

Electing Mark-to-Market

Trading through an entity

Trader definitions

Tax information & news

Discussion Board, F.A.Q.,
Futures, Benefit Plans
& other info

Search this site add text to search window

  Copyright© 2005 - 2012 Colin M. Cody, CPA and, LLC, All Rights Reserved.

Relief from penalties falls into these categories:

  1. Reasonable Cause

  2. General Penalty Relief - including disaster relief

  3. Statutory Exceptions or Administrative Waivers

  4. Correction of a Service Error

  5. Appeals

  6. third-party full or partial abatement of penalties (Appeals settlement usually involving a bulk or batch filer with one penalty issue, but multiple taxpayers)

  7. hazards of litigation, or other Appeals settlement, when the entire penalty is abated

  8. penalties are sustained by Appeals

  9. partial abatement (Appeals settlement where only part of the penalty is abated).

Penalty Reason Code Chart
IMF RC BMF RC PRC Definition/ Relief Criteria
062 062 022 Normal business care and prudence followed, but taxpayer was still unable to comply due to circumstances beyond their control. Generally used when the taxpayer establishes a single circumstance prevented compliance. See IRM
062 N/A 024 IMF - Death, serious illness, or unavoidable absence of the taxpayer or a member of their immediate family. IRM
062 062 025 Records inaccessible / Unable to obtain records / Records destroyed by fire or other casualty. IRM
N/A 062 026 BMF - Death, serious illness, or unavoidable absence of the person responsible for filing and/or paying taxes (i.e., owner, corporate officer, partner, etc.) or a member of their immediate family. IRM
062 062 030 Other - Combination of mistakes. Normal business care and prudence followed, but documentation shows non-compliance was due to circumstances beyond the taxpayer's control. IRM
062 062 046 Y2K Relief.
N/A 062 071 Limited to Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation (MFT 44) - Allows a private foundation reasonable cause for FTF and FTP 90 days after it received a determination letter from the Service stating the organization is a private foundation or it cannot be expected to be a public charity.
N/A 062 072 Membership organization (MFT 67) has no full-time employees responsible for administering finances and was unable to timely file due to little continuity or understanding of duties due to frequent officer changes. Normal business care and prudence.
N/A 062 073 Membership organization (MFT 67) has no full-time employees responsible for administering finances and has no prior history of late filing and claims ignorance of the requirement.

First Time Abate

IRM First-Time Abate (FTA) (December 11, 2009)
(look back at least three years for payment patterns and compliance history)

Penalty Handbook-Introduction and Penalty Relief (November 25, 2011)
Penalty Handbook-Introduction and Penalty Relief (Cont. 1)

Alternate link: IRM First-Time Abate (FTA)  (November 25, 2011)

IRM First-Time Abate (FTA)  (April 5, 2013)

Penalty-and-Interest---Part-20  (April 16, 2013)  (12-11-2009)  (11-25-2011)  (04-05-2013)
First Time Abate (FTA)

  1. RCA provides an option for penalty relief for the FTF (IRC 6651(a)(1), IRC 6698, & IRC 6669), FTP (IRC 6651(a)(2) & IRC 6651(a)(3)), and/or FTD (IRC 6656) penalties if the taxpayer:

    a. Has not previously been required to file a return or if has no prior penalties (except the Estimated Tax Penalty, TC 17X) have been assessed on the same MFT (except MFT 30/31, and see the exception for MFTs 01 and 14 in paragraph (3)(f)) in for the prior preceding 3 years on the same MFT (except MFT 30/31, and see the exception for MFTs 01 and 14 in paragraph (5)(f)), and .

    b. Has filed, or filed a valid extension for, all currently required returns and paid, or arranged to pay, any tax due

        EXAMPLE: Consider the taxpayer current if they have an open installment agreement and are current with their installment payments

    NOTE: If the taxpayer is not currently in compliance per (1)(b) but all other FTA criteria are met, provide the taxpayer an opportunity to fully comply before considering reasonable cause.

    This First-time Abate (FTA) aspect is an Administrative Waiver and does not carry any Oral Statement Authority (OSA) dollar threshold. See IRM for additional OSA information. Also, FTA carries its own PRCs - 018 for non-RCA/manual look-back, or 020 for RCA being used to make the determination. See IRM
  2. Notwithstanding the exception in paragraph (5)(c) of this section, a penalty assessed and subsequently reversed in full will generally be considered to show compliance for that tax period unless the exception in (5)(c) applies. RCA considers fully reversed penalties in its FTA analysis.

  3. The FTA Administrative Waiver can only apply to a single tax period for a given MFT. For example, if a request for penalty relief is being considered for 2 or more tax periods on the same MFT and the earliest tax period meets FTA criteria, penalty relief based on FTA only applies to the earliest tax period, not all tax periods being considered. Penalty relief for all subsequent tax periods will be based on the showing of reasonable cause (and absence of willful neglect).

  4. The reasonable cause explanation provided by the taxpayer will be considered after RCA performs the First-time Abate/Clean Compliance History analysis. If FTA criteria does not apply based on reasons shown in (3)sic(5) below, then the taxpayer’s explanation will be used to determine if reasonable cause penalty relief criteria is met (see Note in paragraph (1)). If the RCA determination is to abate the penalty(s), penalty relief can be granted as appropriate per the RCA conclusion (i.e., Reasonable Cause, Official Disaster Relief area, IRS Error, Statutory and Administrative Waivers). Using the First-time Abate/Clean Compliance History analysis up front was based on a request from HQ Customer Accounts Services.

  5. A First Time Abate conclusion WILL NOT apply if any of the following criteria applies:
    1. Any tax period in the prior 3 years, for the same MFT (except MFT 30/31, and see the exception for MFTs 01 and 14 in paragraph (3)sic(5)(f)), is in TDI Status 02 or 03, or IMF Status 04.

    2. An unreversed penalty for a significant amount (see Caution for an explanation of significant amount) is present (except the ES penalty) on any tax period in the prior 3 years, for the same MFT (except MFT 30/31, and see the exception for MFTs 01 and 14 in paragraph (3)sic(5)(f)), and a notice was issued showing the assessed penalty(s).


      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡


      A module balance cleared with a TC 606 indicates a notice showing the assessed penalty(s) was not issued.

    3. Any penalty reversal or penalty suppression on any tax period in the prior 3 years for the same MFT (except MFT 30/31, and see the exception for MFTs 01 and 14 in paragraph (3)sic(5)(f)) was input with Penalty Reason Code (PRC) 018, 020, or 021. See Exhibit 20.1.1-2, Penalty Reason Code Chart.

      Additional criteria specific to BMF accounts is as follows:

    4. Any portion of an The FTD penalty is charged for EFTPS Avoidance. Taxpayers required by law to deposit using EFTPS have received multiple notifications from the Treasury Financial Agent (TFA) and the Electronic Tax Administration (ETA) prior to their required EFTPS start date. Use RCA for normal penalty relief consideration.


      Beginning Jan. 1, 2011, all required deposits must be made by EFTPS, and the TFA/ETA notifications were discontinued. However, this criterion will continue to apply.

    5. A total of three four or more FTD Penalty Waiver Codes are present in the taxpayer's three-year penalty history for the same MFT (see the exception for MFTs 01 and 14 in paragraph (3)sic(5)(f)). Waiver Code 24 is set when the FTD penalty is waived due to a change in deposit frequency. Waiver Code 25 is set when the FTD penalty is waived per LEM IRM, Restrictions on Assessments criteria. When a Waiver Code applies, the applicable Waiver Code will be shown with the literal "FTD PEN WAIVER CD" on CC BMFOL definer "R." RCA will check the taxpayer's three-year history for the presence of three four or more Waiver Codes.

    6. The three-year penalty history for either MFT 01 (Form 941, Employer's Quarterly Federal Tax Return,) or MFT 14 (Form 944, Employer's Annual Federal Tax Return,) must include a review of both MFT 01 AND MFT 14 accounts.


      Taxpayer A files Form 944 for tax year 2008 2010 and is assessed a FTD penalty (TC 186) on the MFT 14 account. For all years prior to tax year 2008 2010, the taxpayer filed Form 941. The MFT 01 account for the 2nd quarter of year 2006 (200606) 2009 (200906) has unreversed FTD, FTF, and FTP penalties; therefore, the taxpayer does not qualify for FTA relief on the MFT 14 account for 2008 (200812) 2010 (201012).

  6. When checking the three-year penalty history, RCA does not recognize any module(s) that has moved to the retention register. This should not be a problem when using RCA on current tax periods; however, when using RCA for an older tax period, the employee must manually review any tax period(s) in the three-year penalty history that has gone to the retention register.

  7. If RCA determines a First -Time Abate is applicable, correspondex letters 3502C for BMF FTD penalty relief, or 3503C for IMF FTF and/or FTP penalty relief can be generated through RCA and IDRS. Both letters contain a paragraph automatically selected by RCA informing the taxpayer that the penalty(s) was removed based on their history of compliance. The following is an example of this paragraph:

    We are pleased to inform you that your request to remove the (use applicable penalty, i.e. failure to file, failure to fay, or failure to deposit) penalty(s) has been granted. However, this action has been taken based solely on your compliance history rather than on the information you provided. This type of penalty removal is a one-time consideration available only for a first-time penalty charge. IRS will base decisions on removing any future (failure to file, failure to pay, failure to deposit) penalties will only be removed based on your providing information  on any information you provide that meets reasonable cause criteria. You should receive a notice of penalty adjustment within the next few weeks.


    Include an explanation that educates the taxpayer how to be compliant in the future.

  8. First-time abatement may be considered for FTF (assessed under IRC 6651(a)(1), IRC 6698, or IRC 6669) and/or FTP (IRC 6651(a)(2) & IRC 6651(a)(3)),  on all returns (except those listed in a) below) forms (see Exception , following Note , below). The employee must check the three prior years, and all subsequent periods already due, and document the clean compliance history. If RCA is not used to consider first-time relief and relief is granted, use PRC 018 when making the adjustment. Notify the taxpayer that the penalty removal was based on their history of compliance rather than on the information they provided (see example paragraph above). Also include an explanation that educates the taxpayer about how to be compliant in the future.


    If RCA does not offer FTA relief because the FTD penalty was charged for EFTPS Avoidance, FTA relief can still be granted for the FTF and/or FTP penalties, if applicable.


    a. Penalty relief under the FTA provision does not apply to

    returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return, and Form 709, United States Gift (and Generation - Skipping Transfer) Tax Return;

    the Daily Delinquency Penalty (DDP);

    Form 1120, U.S. Corporation Income Tax Return/Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior 3 years, at least 1 Form 1120S was filed late but not penalized.

    Information reporting that is dependent on another filing, such as various forms that are attached

    This list is not all-inclusive.

  9. if the tax is not paid in full on the tax period when the request for abatement is received and the taxpayer is current with installment agreement payments, allow first-time abate/clean compliance history on the failure to pay (FTP) penalty amount assessed. Use RC 062 with the TC 271 and PRC 018 or 020. This will allow the FTP penalty to start up when the TC 271 posts to Master File on the remaining tax due. While the first-time abatement is due to an administrative waiver, not reasonable cause, the RC 062 will not restrict the tax period and is to be used in this instance only. The proper use of the PRC will allow for the tracking of first-time/compliance history abatements.


    The employee will need to use the open paragraph in the 3502C or 3503C letter to inform the taxpayer that the FTP penalty will start accruing again on the unpaid taxes and will continue until the tax is paid in full. After the tax is paid in full, the taxpayer may request reasonable cause abatement of the additional FTP penalty. Use PRC 018 or 020.

  10. If the tax is fully paid, the First-time Abate/Clean Compliance History adjustment to the FTP (TC 271) may be done using RC 065 (IMF Accounts) with PRC 018 or 020 as the restrictive action will not have a negative effect. Adjustment notices will be sent in both abatement instances.

  11. RCA will also display a First-time Abate window on a BMF account when the taxpayer has a change in deposit frequency. Employees need to be aware this is different than a First-time Abate for a good compliance history and use the appropriate PRC when removing the penalty for a first-time change in deposit frequency.

By Gail Perry

Employees at the Greenwood, Ind., office of the Internal Revenue Service were more than a little surprised a few weeks ago when a disgruntled man pointed a gun at a revenue officer saying, "You can't do this. You can't take my money like this."

No one was injured and the man was arrested, but it leads one to wonder about a system that brings out such a violent response from someone who clearly wasn't satisfied with his tax situation.

IRS spokesperson Pat Brummer was at the scene of the Greenwood incident.

"That's not really a good way to negotiate," she quipped. "We obviously don't want people to talk to us that way. We want them to talk to us face to face. People need to know they can sit down and talk; there are many avenues to negotiate."

While accountants may attempt negotiation with the IRS on a regular basis, many taxpayers may be surprised to learn that the IRS is open to negotiation. In particular, the IRS has the ability to be flexible in the area of penalty reduction or abatement for late filing of tax returns and for underpayment of taxes.

Excuses, excuses

When arguing for a penalty waiver or reduction based on reasonable cause, each case is considered on its own merits. But here are some examples of successful, and not-so-successful, attempts at penalty abatement.

Excuses that might work

* Natural disasters, like fires, hurricanes, floods, tornados - a non-preventable event that somehow results in an inability to process tax documents.

* An individual responsible for a function necessary to the completion of the tax return is unexpectedly unavailable.

* Tax professional in full possession of the facts gave wrong advice to the taxpayer, who had no reason to have knowledge to the contrary.

* Computer crashes or other computer-related problems.

* Family emergencies, including, but not limited to, illness and death in the family.

* Financial hardship resulting from an unexpected emergency.

* Tax or payroll service provider with history of timely filing and payment does not file or pay tax amount on time.

* New business, not aware of responsibility to file.

Excuses that don't work

* Giving your tax return to a tax professional to mail. "The failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not 'reasonable cause' for a late filing under 6651(a)(1)." United States v. Boyle, 469 U.S. 241 (1985)

* Not having enough money. The IRS expects you to plan ahead and budget for your taxes.

* Too young to pay tax. There's no such thing.

* Assumed that the withholding at work would be enough to cover the tax bill.

But that's just the tip of the iceberg. Here's a Web site with 315 excuses for late filing or payment (it should be noted that all have been rejected by the IRS or the courts):

The above link was taken down recently.  The data has been modified and mirrored here:

update: The original's back, and it is better than ever!

The IRS's operation handbook, the Internal Revenue Manual, sets out general rules for negotiating penalty abatement. The ability to grant relief from penalties falls into four categories: reasonable cause, statutory exceptions, administrative waivers and correction of service error. Taxpayers and preparers find that there is flexibility in the area of reasonable cause when it comes to negotiating a settlement for a penalty.

"Reasonable cause is something that really is a facts-and-circumstances test," said Marvin Michelman, director of tax controversy services at Deloitte Tax. "You have to look at everything involved, what caused the problem, how quickly did someone act to remediate it."

The IRM states, "Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations, but is then unable to comply with those same obligations."

"You have to look at all the facts and find that one fact that demonstrates why the penalty should be abated," said Michelman. He also recommended writing a "very fact-specific letter, explaining all the steps you have taken."

For example, if a taxpayer blames a computer crash for a belatedly filed tax return, Michelman explained that the taxpayer should be able to present records showing when the crash was discovered, that it was worked on, what information was stored on the computer, and how the crash prevented the taxpayer from meeting the deadline.

Turnover in personnel can cause problems that result in late payment or late filing penalties. "In small businesses, we see a lot of heads of business or heads of bookkeeping who had an illness or there was an illness in the family, and there was no way for the business to file on time. The IRS reacts favorably [in terms of penalty abatement] to illnesses in the family of the person responsible for the books," said Dan Wilds, director at the PricewaterhouseCoopers national tax service in Washington.

"Turnover is a big deal" in small businesses as well, said Ruth Perez, also with the PwC national tax service. But turnover alone isn't enough to warrant an abatement. "The small business would have to say that even though an accountant quit, we immediately started looking for someone else. It's not that we dropped the ball and we have no one responsible for tax any more," explained Perez.

When it comes to late payments, past history is extremely important. "The IRS does look at compliance history," said Perez. She explained that the service will look back over several years to see if there have been late payments in the past.

"The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care," according the manual. Even if this is the first time that a taxpayer has made a late payment, that alone is not sufficient cause to abate the penalty. The IRM states that the compliance history will be weighed with other reasons that the taxpayer gives for the late payment.

Norman Neubauer, manager of tax training for Kansas City-based H&R Block, pointed out that a penalty for late filing is one penalty that shouldn't be incurred in the first place. "Even if you don't pay the tax on time, if you file the return on or before the due date there is no penalty for filing late, so Tip No. 1 is just not to incur the penalty in the first place."

Eric Smith, a spokesperson for the IRS, agreed. "A lot of people still remember the old rules where you could not get an extension without estimating the tax and submitting a payment with the extension request," he said. "You still have to estimate the tax due and make a reasonable estimate, but in order to get the extension you no longer have to make a payment with the extension request."

The IRS offered five suggestions for including information in an explanation letter:

1. What happened and when did it happen?

2. During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax or otherwise complying with the law?

3. How did the facts and circumstances prevent the taxpayer from complying?

4. How did the taxpayer handle the remainder of their affairs during this time?

5. Once the facts and circumstances changed, what attempt did the taxpayer make to comply?

Smith pointed out that ignorance of the law is not ordinarily considered an excuse worthy of abatement.

"The other thing is maintaining a clean history," Michelman said. "If this is the first time you've ever been penalized, that shows you've really tried to comply. There was this one footfall, but you were working hard to avoid it. When the IRS looks at your record, they will be able to see that you've never had a problem."


Using the First-Time Penalty Abatement Waiver 

  • The IRS’s first-time abatement penalty waiver (FTA), although introduced 12 years ago, is infrequently used by qualifying taxpayers. An FTA can be obtained for a failure-to-file, failure-to-pay, or failure-to-deposit penalty.
  • A taxpayer may claim an FTA for only a single tax period. To qualify, taxpayers must not have been assessed any other penalties of a “significant amount” on the same type of tax return within the past three years and must be in compliance with all filing and payment requirements.
  • IRS personnel use a decision-support software tool called the Reasonable Cause Assistant (RCA) to help determine whether a taxpayer is eligible for an FTA. However, the RCA has been criticized for yielding a high percentage of incorrect determinations of FTA eligibility that IRS personnel generally do not correct.
  • Through persistence, a practitioner can often persuade the IRS to reverse an initial incorrect determination that a taxpayer does not qualify for an FTA.

It is safe to assume that most taxpayers dislike paying taxes and hate paying IRS penalties, especially when the penalties seem unjust. While penalties can also seem arbitrary to taxpayers, IRS policy is clear and deliberate on their reason for existence: to deter taxpayer noncompliance, not to generate revenue.1

For that reason, 12 years ago, the IRS created the first-time penalty abatement administrative waiver (FTA),2 which allows typically compliant individual and business taxpayers to request abatement, or removal, of certain penalties that the IRS has assessed against them for the first time. In effect, the IRS rewards typically compliant taxpayers with one-time penalty amnesty, which can save the taxpayer hundreds—sometimes thousands—of dollars.

Despite the advantages of this IRS waiver, few taxpayers who qualify for FTA request it, according to a 2012 report by the Treasury Inspector General for Tax Administration (TIGTA).3 According to the report, the problem is twofold: Most taxpayers and tax professionals do not know FTA exists, and IRS representatives often incorrectly disallow an FTA when using the IRS’s faulty automated decision tool to make penalty determinations.

In effect, FTA is hidden to most taxpayers and tax practitioners, who may not be aware of how it works, how to request it, or even its existence. This article explores the IRS FTA waiver and explains how to help clients remove certain penalties using it.

Penalties and Abatement

In fiscal 2012, the IRS assessed 37.9 million penalties against taxpayers totaling $26.8 billion.4 Individual, business, and payroll penalties for failure to file, failure to pay, and failure to deposit (the types potentially eligible for FTA) were 74% of all penalties assessed in 2012.5 The IRS assesses most of these penalties automatically, regardless of the taxpayer’s situation.

Methods for Requesting Penalty Relief

Taxpayers can request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three ways, depending on their situation:

  • Before the IRS assesses a penalty, the taxpayer can file a penalty nonassertion request with a paper return to request that the IRS not automatically assess a penalty.
  • After the IRS has assessed a penalty, the taxpayer can request penalty abatement, typically by writing a penalty abatement letter or by calling the IRS. Tax professionals can also request abatement using IRS e-services.
  • After the taxpayer has paid the penalty, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement.6 The taxpayer must file the claim within three years of the return due date or filing date, or within two years of the date the penalty was paid.

Reasons to Request Abatement

Generally, relief from penalties falls into four separate categories: reasonable cause, statutory exceptions, administrative waivers, and correction of IRS error. Under the category of administrative waivers, the IRS may formally interpret or clarify a provision to provide administrative relief from a penalty it would otherwise assess. The IRS may address an administrative waiver in either a policy statement, news release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions. The most widely available administrative waiver is FTA.

First-Time Abatement Waiver

In 2001, the IRS established FTA to help administer the abatement of penalties consistently and fairly, reward past compliance, and promote future compliance. This administrative penalty waiver allows a first-time noncompliant taxpayer to request abatement of certain penalties for a single tax period—one tax year for individual and business income taxes and one quarter for payroll taxes.

According to TIGTA, for tax year 2010, the average individual failure-to-file abatement qualifying under FTA was $240, and the average failure-to-pay abatement was $84. However, more than 90% of individuals who qualified for an FTA did not receive the waiver for 2010.7 This is likely because taxpayers did not know they could request it. The IRS does not publicize FTA as a relief option on its penalty-related notices or on its website.8

The remainder of this article discusses how to determine whether a client qualifies for FTA and how to request it from the IRS.

Penalties Eligible for an FTA

FTA applies only to certain penalties and certain returns filed. First, determine whether FTA applies to the client’s situation:

  • Individual taxpayers can request an FTA for failure-to-file and failure-to-pay penalties. Estate and gift tax returns do not qualify for FTA waivers.9
  • Business and payroll taxpayers can request an FTA for failure-to-file, failure-to-pay, and/or failure-to-deposit penalties. The IRS is not explicit in its Internal Revenue Manual (IRM), but in practice, the IRS has granted FTAs for S corporation and partnership late-filing penalties.10
  • For individual and business taxpayers, the estimated tax and accuracy-related penalties cannot be waived under FTA.

Clean Compliance Criteria

If FTA applies to the client’s situation, the practitioner must determine whether the client qualifies to receive it, which entails most of the complexity involved in requesting an FTA. To qualify, the client must demonstrate filing and payment compliance and a three-year clean penalty history.

To meet the rule for filing compliance, the client must have filed, or filed a valid extension for, all currently required returns and must not have an outstanding request from the IRS for an unfiled return.11 To meet the payment compliance rule, the client must also have paid, or arranged to pay, any tax due. The client can have an open installment agreement, as long as installment payments are current. According to the IRM, the IRS should give a taxpayer not currently in compliance with these payment requirements an opportunity to comply and thereby qualify for an FTA before the IRS considers whether the penalty can be abated for reasonable cause.12

To meet the rule for clean penalty history, the client cannot have had penalties of a “significant”13 amount assessed in the prior three years on the same tax return for which the client is requesting abatement. IRS procedures do not publicly define a “significant” amount. In practice, the IRS has considered any penalty amount as significant in its application of the FTA qualification.14 If the IRS rejects the client’s request because of a small penalty assessment, remind the IRS of the “significant” qualification in the IRM.

The client will not be disqualified from receiving an FTA based on lack of a clean penalty history if the client:

  • Had a penalty assessed more than three tax years prior to the tax return in question.
  • Had an estimated tax penalty assessed in the past three years.15
  • Received reasonable-cause relief from penalties at any point in the past.
  • Received an FTA more than three tax years prior to the tax return in question.
  • Has penalties on subsequent tax years.16

Requesting an FTA

By phone or e-services: A practitioner who determines that the client qualifies for an FTA can request it in several ways. Start with simple methods. If the client’s case does not involve a compliance function, call the IRS Practitioner Priority Service (PPS) line17 or use the IRS e-services Electronic Account Resolution function.18 The IRS representatives in Accounts Management have authority to grant an FTA.

When an IRS compliance unit assesses the penalty, requesting an FTA from a PPS representative or by e-services will not work. For example, for a taxpayer under audit or underreporter inquiry or with a case in IRS Collection or Appeals functions, the appropriate compliance unit will address penalties based on the taxpayer’s facts and circumstances. If a compliance unit assesses a penalty, penalty relief must typically be requested directly from that unit.19

Keep in mind that there is an unpublished ceiling on the amount in penalties that the IRS will abate under FTA by phone or e-services (referred to as oral statement authority).20 The IRS redacts the oral statement authority threshold amount in its IRM for tax administration purposes.21

For reasonable-cause determinations, in lieu of accepting an oral request, the IRS can require taxpayers to send in documentation to support their claim. The IRS representative can accept “credible information” orally or in writing. The IRS’s automated Reasonable Cause Assistant (see below) prompts the representative to ask for documentation.22 If the client’s penalties exceed the threshold, the waiver still applies, but IRS procedures require that the FTA request be in writing.23 In practice, when requesting abatement of penalty amounts in thousands of dollars, be prepared to request an FTA in writing.24

In writing: When requesting an FTA in writing, provide any other relevant penalty relief arguments, including reasonable-cause arguments, to increase the client’s chances of having the penalty removed.

If the client has clear reasonable cause for the penalty, present the reasonable-cause argument first and request that the IRS abate the penalty on those grounds. This is a best practice because the client may need to use the FTA waiver for a subsequent year, and abatement due to reasonable cause will not disqualify the client from receiving an FTA.

If the client technically does not qualify for an FTA because of a penalty in the past three years but is otherwise compliant, present this history in conjunction with other arguments to the IRS for penalty abatement. Remind the IRS that although FTA does not apply, the client has a clean compliance history except for the one incident of noncompliance.

If the client has multiple years of penalties, request an FTA for the first year if the prior three years have a clean compliance history. If applicable, other arguments, such as reasonable cause, can be presented for subsequent years.

Example: C filed late returns with a balance due for 2010 through 2012. As a result, the IRS assessed C failure-to-file and failure-to-pay penalties for all years. She was also assessed an estimated tax penalty for all years as a result of not paying sufficient estimated taxes and withholding. These were the taxpayer’s first instances of noncompliance. C’s tax professional determines that she has a reasonable-cause argument for 2012, based on her facts and circumstances and the application of reasonable-cause criteria. The tax practitioner obtains an FTA for the 2010 failure-to-file and failure-to-pay penalties and submits a reasonable-cause penalty abatement request for 2012. The estimated tax penalties cannot be abated with the FTA waiver.

The written FTA request should be sent to the IRS service center where the client is required to file paper returns.25

IRS Abatement Determinations Often Flawed

When the taxpayer or practitioner calls or writes the IRS to request an FTA, the IRS evaluates the request using an automated tool. To uniformly apply penalty abatements, the IRS developed a decision-support software program called the Reasonable Cause Assistant (RCA). The program was designed to help IRS employees make penalty relief determinations for individuals (failure-to-file and failure-to-pay penalties) and businesses (failure-to-deposit penalty). The IRS requires its employees to use this program to make determinations on penalty abatement requests, including requests for an FTA.

Although the IRS has tried to uniformly and consistently apply penalty abatement determinations, the use of the automated RCA has led to unfair determinations, including FTA decisions. According to a 2011 IRS Advisory Council (IRSAC) report, the RCA makes incorrect determinations in 55% of all penalty abatement requests.26 A 2012 TIGTA report stated that, of its sample of abatements determined using the RCA, 89% were incorrect. Further, in the TIGTA study sample, IRS employees corrected none of the inaccurate determinations, even though the determinations conflicted with IRM penalty abatement procedures.27 IRS employees can, however, abort the RCA process when its determination conflicts with penalty abatement policy. If the IRS employee aborts the RCA, he or she can then make a decision based on whether the taxpayer’s facts meet the clear criteria for FTA qualification.

Be prepared by researching the client’s clean compliance history and applying the qualification rules before contacting the IRS. If the client qualifies but the IRS representative says the client does not, ask the representative to override the RCA determination. If the representative will not override it, ask for the representative’s manager. Finally, if all other means have been exhausted, consider contacting the Taxpayer Advocate Service (TAS) for help.28 Keep in mind that IRS representatives often simply do not know how to use the RCA, thus resulting in errors.29 If the IRS representative is unsure about how to use the program, a practitioner who is sure the client qualifies can try calling back to request an FTA again.

In most circumstances, with proper knowledge of the client’s facts and qualification, a practitioner can obtain an FTA from the IRS PPS representative, who has oral statement authority on FTA.

FTA Confirmation

A client to whom the IRS grants an FTA will receive Letter 3502C or 3503C30 for individual failure-to-file and failure-to-pay penalty abatement and Letter 168C (or its equivalent)31 for business failure-to-deposit penalty abatement. The letter usually arrives about four weeks after the IRS grants the FTA.

The Future of FTA

Encouraging compliance is one of the IRS’s major goals as it focuses on closing the $450 billion annual tax gap.32 The proper use of penalties helps deter noncompliance, and it is clear that the IRS has been using penalties to that end. During the past 11 years, the number of penalties assessed increased by 34%, from 28.3 million penalties in 2002 to 37.9 million in 2012.33 However, to increase voluntary compliance, the IRS must administer penalties fairly and consistently.

In the spirit of consistency, why not give an FTA to every qualifying taxpayer? The TAS has suggested this very concept to promote fairness. In its 2010 Report to Congress,34 the TAS proposed that the FTA waiver be automatically applied before the penalty is assessed rather than requiring taxpayers to request an FTA. The intent of the FTA waiver is to reward past compliance and promote future compliance. However, as the TAS noted in its 2010 report, the total number of penalty abatements has decreased as the number of penalties assessed has increased, demonstrating that penalty relief options, including FTA, are not fulfilling their intended purpose of encouraging compliance.

However, granting an FTA to all qualifying taxpayers could undermine penalty administration. The fact that a taxpayer has to request abatement and receive a letter represents a tangible opportunity for the IRS to promote compliance. The abatement notice and accompanying discussion constitute a quantifiable event in which the IRS communicates with the taxpayer and the taxpayer understands the consequences of future noncompliance.

The IRS stated in its response to the 2010 TAS Report to Congress that it is studying whether FTA increases compliance and whether a system to grant FTA waivers prior to penalty assessment should be implemented. To date, the IRS has not concluded the study.

To ensure uniformity among all penalty abatement requests, the IRS needs to create a more uniform policy to remove errors caused by reliance on its RCA and train assigned personnel to review penalty abatement requests. In 2011, the IRSAC Small Business/Self-Employed subgroup recommended that the IRS develop a clear penalty abatement request form that would guide taxpayers in evaluating their circumstances against penalty abatement criteria, including FTA. This form would eliminate confusion about how to request penalty abatement, define the criteria for removing penalties, and facilitate fairness and consistency. Practitioners should look for this form in the future.

The report points out that Form 843, Claim for Refund, can be used for penalty abatement but that it is not designed for penalty abatement because it does not guide the taxpayer to address abatement requirements. IRSAC states that the Form 843 instructions for penalty abatement are “confusing at best.” The form is also not designed for unpaid penalties. The very name of the form implies that it should be used for post-payment refund requests, not penalty nonassertion or abatement requests prior to payment of a penalty.35 Form 843 instructions were changed in December 2012, but not to enable it to better address possible penalty abatement arguments and simplify abatement requests.

With TIGTA and TAS reports highlighting the IRS’s inconsistent application of penalty abatement, the IRS will likely make some changes in its requirements and procedures for requesting and granting penalty abatements in the future. For now, if the client qualifies, the practitioner can effectively request and receive relief for the client’s penalties using this largely unknown and beneficial administrative waiver.



1 IRS Policy Statement 20-1 (6/29/04) at Internal Revenue Manual (IRM) § See also IRM §

2 Treasury Inspector General for Tax Administration (TIGTA), Penalty Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage Voluntary Compliance, Rep’t No. 2012-40-113 (Sept. 19, 2012).

3 Id.

4 IRS Data Book, Table 17, “Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty,” at 42 (2012).

5 The number of penalties assessed for individual, business, and employment taxes for delinquency, failure-to-pay, failure-to-deposit, and S corporation/partnership late-filing penalties exceeded 28 million in 2012. See IRS Data Book, Table 17.

6 Form 843, Claim for Refund and Request for Abatement, does not allow requests for penalty abatement under FTA. Line 5a of the form allows abatement due to erroneous written advice by the IRS, reasonable cause, or other reasons allowed under the law. FTA is an administrative waiver and does not qualify as an “other reason allowed under the law.” See Form 843 Instructions, December 2012.

7 TIGTA Rep’t No. 2012-40-113.

8 Searching “penalty abatement” on yields a “top recommendation” among search results of IRS Tax Tip 2012-74, dated April 17, 2012, titled “Failure to File or Pay Penalties: Eight Facts.” First-time abatement is not mentioned.

9 IRM § (11/25/11). See also exceptions at paragraph (8).

10 Id.

11 IRM § states that the taxpayer cannot have a tax period in the prior three years in TDI (taxpayer delinquency investigation) status 02 or 03, or IMF (individual master file) status 04 (delinquent return status codes). To qualify, the taxpayer should not have any required returns outstanding in the past six years. See IRS Policy Statement 5-133 at IRM §

12 IRS Memorandum SBSE-20-0413-0690 (4/5/13), adding new paragraph (1)(b) to IRM §, amending paragraph (9), and making minor syntactical and formatting revisions elsewhere.

13 IRM §

14 Id. The IRS redacts the explanation of “significant amount.” This is a facts-and-circumstances test, and the IRS should not use a bright line in determining whether the amount is significant. Many IRS representatives look for the presence of a penalty using penalty transaction codes on the taxpayer account to determine qualification and thus avoid making a subjective determination of whether the penalty amount is significant.

15 IRM §

16 IRM § If the taxpayer is requesting relief for penalties assessed on two or more tax periods, FTA criteria can apply to the earliest tax period, as long as the taxpayer meets the clean penalty history criteria for the three tax years prior to the earliest tax period.

17 Practitioner Priority Service: 866-860-4259.

18 Web portal here.

19 See IRM § for post-assessment abatement procedures, which state that the function responsible for the penalty assessment should decide whether the penalty should be abated.

20 See IRM § (11/25/11) for oral requests for penalty abatement.

21 The author requested information regarding first-time abatement, including the oral statement authority amount, under the Freedom of Information Act (FOIA); however, the IRS denied the request, citing several FOIA exemptions, including Sec. 6103(e)(7), which precludes releasing information that could potentially impair tax administration.

22 See IRM §§ and .6.

23 IRM §

24 Although the threshold amount is unpublished, the author has experienced FTA thresholds of less than $1,000 to be routinely allowed by the IRS without a written request.

25 See Form 843 instructions at “Where to File.”

26 IRS Advisory Council, 2011 Public Report, “Small Business/Self-Employed Subgroup Report,” at 73 (Nov. 16, 2011).

27 TIGTA Rep’t No. 2012-40-113.

28 A Taxpayer Advocate Service memo, “Interim Guidance on Penalty Relief Advocacy, and Using the Reasonable Cause Assistant (RCA),” dated Feb. 7, 2012 (Control No. TAS-13-0212-007), states that the TAS does not have delegated authority to make penalty abatement determinations under Delegation Order No. 13-2 (3/3/08). However, the memo explains, the delegated authorities do not preclude the TAS from making specific recommendations to the IRS to abate penalties.

29 TIGTA Rep’t No. 2012-40-113. The IRS agreed to RCA modifications and to provide training to its employees on using the RCA.

30 IRM §

31 This letter adjusts the failure-to-deposit penalty. It states that the abatement action has been taken based solely on the fact that the taxpayer has a good history of timely filing and paying, that the abatement is a one-time consideration, and that any future penalty relief decisions will be made based on reasonable-cause criteria.

32 News Release IR-2012-4, IRS estimate for tax year 2006.

33 IRS Data Book, Table 17; historical data available here.

34 National Taxpayer Advocate, 2010 Annual Report to Congress, Most Serious Problem No. 14, “The IRS’s Over-Reliance on Its ‘Reasonable Cause Assistant’ Leads to Inaccurate Penalty Abatement Determinations,” at 202 (Dec. 31, 2010).

35 IRS Advisory Council, 2011 Public Report, “Small Business/Self-Employed Subgroup Report,” at 74–78.



Jim Buttonow is vice president of product development for Beyond415 in Greensboro, N.C., and is a former IRS large-case team audit coordinator. For more information about this article, contact Mr. Buttonow at



BNA - Reasonable Cause Can Waive Penalties:

Motley Fool - Reasonable Cause:

Taxpayer's Voice  - Reasonable Cause - What It Means To You:

Avoid the 10% early withdrawal penalty:



[ Home ] [ Webmaster ] [ We Listen ] [ CPA Services ] [ Who We Are ] [ Order the TradersTaxPlan ]

Last updated: January 20, 2014

web counter
visitors since
January 2014
, TradersTaxPlan, TradersAdvantage,
, DoYourOwnTaxes, DoingYourOwnTaxes,,,,
, DoYourOwnTaxesOnline
,, and
are trademarks and service marks of Colin M. Cody, CPA and, LLC, Trumbull Connecticut
Copyright© 2005 - 2012 Colin M. Cody, CPA and, LLC, All Rights Reserved