In the fall of 2012, TIGTA released a somewhat scathing report on the IRS administration of the first time abate program (FTA). For readers who are unfamiliar, FTA allows taxpayers to abated various delinquency penalties on late returns if certain requirements are met. The provisions are very taxpayer friendly, and, as highlighted in the TIGTA report, underutilized. The reason for FTA being underutilized is that most taxpayers are unaware of the program and the IRS never offers it up as a potential solution; taxpayers must request the abatement.
Last year, I drafted a post about the program, which provides greater details on the requirements and availing yourself to FTA, which can be found here.
Last week, the IRS released an email memorandum providing internal guidance on the administration of FTA. The email is not lengthy, but it does provide some insight, and is interesting because it is one of the few items of guidance on FTA outside of the IRM provisions dealing with the program. The IRM provision is found at IRM 22.214.171.124.
After finding the taxpayer did not qualify for the statutory reasonable cause exception, the Service stated that FTA did apply to the failure to deposit penalties. This is stated in the IRM as one of the three penalties that can be abated, along with the failure to file and failure to pay penalties. The taxpayer being discussed did not qualify for FTA, and it appeared the examining agent had requested a review for FTA, not the taxpayer. The memorandum gave the impression that this should not be considered until raised by the taxpayer.
After that finding, the advice provided answers to some general questions. First, the memorandum stated that FTA would be appropriate for penalty relief during exam and prior to the penalty being assessed. The memo states that since FTA is not a statutory mandate, the rationale is based on IRS policy and in the drafter’s opinion, assessing the tax would be a waste of Service resources if FTA was appropriate. This provides important taxpayer and practitioner guidance that FTA can and should be brought up during exam, and the agent should be directed to this email if he or she resists. I think many practitioners assumed this to be true, but I do not believe the IRM stated as much.
The second question was whether FTA could be applied to any year (highest penalty amount), or if it had to be applied to the earliest tax year. The memo stated that it had to go towards the earliest tax period, as directed under the IRM. Although not stated in the memorandum, the basis for this appears to be IRM 126.96.36.199.6.1(2). My initial thought was that taxpayers should pay the penalties for prior years before requesting FTA for the highest year; however, FTA is generally only available if penalties have not been imposed for the prior three years, so that would not work for most taxpayers.
Somewhat related, when I drafted the earlier post, I had multiple clients going through the FTA program. One taxpayer had a substantial ($150k plus) penalty, but appeared to qualify. Given the dollar amount, I was concerned that the Service would take a harder look. The FTA request was provided in August, and I spoke with Collections at that time, which indicated collection activity would cease until the FTA determination was made. In December, the Service had not responded to the FTA request, but collection activity resumed. Thankfully, a somewhat panicked call to the IRS was met with a response that the collection letter was a mistake, and we would have a response on FTA within two weeks. About a month later, the IRS responded by letter indicating that our request was granted, but the Service retained the right to reverse upon examination. A very positive result, and handled in the same manner as my smaller FTA cases and generally within the same time frame.