Not filing or paying taxes is pretty much always a bad idea. Nonpayment of taxes can lead to all kinds of penalties, from audits and fines to levies, liens and collections. But as we’ve also discussed, there are ways to ameliorate your situation if you haven’t filed or paid on time (or for quite some time). Whenever possible, the IRS infinitely prefers to help people be able to pay what they owe than to punish them for not being able to.
One particular way they do this is through the first-time penalty abatement (FTA) waiver. This waiver allows delinquent taxpayers who meet certain criteria to have their tax penalty canceled—specifically, if it’s the first time (or the first time in quite a while) that the taxpayer has been penalized. To put it more simply, this waiver exists to allow usually compliant taxpayers one free mistake. Here’s the criteria you need to meet to qualify for first-time penalty abatement.
- Be penalized for failing-to-file, failing-to-pay, or failing-to-deposit. Other penalties (such as those related to tax form accuracy) do not qualify.
- Claim or apply for the FTA only once/for one tax year, and have had no tax penalties of significant value assessed on you within the previous three years. If you had penalties assessed further back than three years, or in more recent years than the tax year for which you’re applying, you can still qualify.
- File, arrange to file, or file extensions for all required tax returns for the tax year in question.
- Pay or make arrangement to pay all taxes owed for the tax year in question. Installment agreements are permitted.
While it is not part of the required criteria, it is considered beneficial to your chances of successfully receiving the FTA if you provide the IRS with reasonable cause evidence and documentation—that is, give them a good reason why you were unable to file, pay, or deposit your taxes as directed. Knowing you had extenuating circumstances will go a long way toward the IRS’s willingness to forgive your atypical mistake.
To claim or apply for the FTA waiver, contact the IRS by phone or snail mail. Be advised that the IRS often uses an automated software system to evaluate FTA applications, and that the system has been known to return inaccurate decisions. If your application is denied, you have every right to reach out to an IRS representative to review your application. They may be able to cancel or override the software program’s decision. You may also take the decision to the IRS Appeals department.
One final note: because continued communication with the IRS can be complex, if you do apply for an FTA, it may be helpful to engage a CPA or tax attorney to assist you. These professionals are trained to advocate for you with the IRS, and their expertise may prove invaluable in making sure your FTA goes through. But either way, if you have a clean history and just slip up one year, the IRS does allow you a good chance to get out of that first penalty.