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First Time Abate — Ignorance is Bliss, Even in Penalty Relief

Posted on Aug. 2, 2013

Unfortunately, taxpayer ignorance about the first time abate program is keeping most of them from taking advantage of its very taxpayer friendly penalty abatement provisions.

In the Internal Revenue Manual, under the reasonable cause penalty abatement provisions for the failure to file and failure to pay penalties, is an underutilized provisions for penalty abatement called the first time abate program. See IRM The program was instituted in the early 2000s, is not publicized, and the IRS does not notify taxpayers about the program when it imposes penalties. The program is essentially a free pass for the first time a taxpayer makes a mistake.

This program is completely discretionary for the Service and not imposed by statute or regulation. Certain taxpayers do not qualify, and event based returns (think Form 706 for the federal estate tax) are not included. In order to participate, a taxpayer must be otherwise compliant, and must not have been required to file the return before or did not have penalties imposed for the prior three years.  If a taxpayer has had penalties imposed in the prior three years, but had them removed, the taxpayer may still qualify. As showing actual reasonable cause in some cases can be very difficult or time consuming, this program may provide relief to taxpayers who would otherwise be forced to pay penalties.

In December of 2012, the Treasury Inspector General for Tax Administration issued a fairly scathing report on the Service’s implementation of the program, highlighting that the lack of taxpayer knowledge of the program undermines its stated goal of encouraging voluntary compliance. TITGA estimated that close to 1.5 million qualifying taxpayers did not take advantage of the program, and close to $200MM in penalties were paid that could have been abated. The Internal Revenue Manual was updated in April of 2013 to clarify the current level of compliance of taxpayers’ trying to enter the program, but the changes do not appear to be that significant.  The Service has posted a public web page about the program, which can be found here. The page indicates that taxpayers can request abatement by mailing the request to the applicable service center, by calling the service, or by filing Form 843, Claim for Refund and Request for Abatement.

I have reviewed a few penalty assessments over the last month or two, and the Service is not issuing notice regarding the program, and each of these taxpayers probably qualified. I also currently know of a handful of taxpayers requesting abatement, including a few with very high dollar penalty amounts. Each appears to be clearly within the guidelines, and I will update the blog with the outcomes and practical experiences.

Moving forward, it will be interesting to see if the Service takes any additional steps to disseminate information about the program.  It will also be interesting to see what happens if/when qualifying taxpayers are denied abatement.  There is no statutory framework creating this abatement, which would appear to give the IRS wide latitude in deciding whether the penalties should be abated.  Conversely, holdings like Kearney Partners, LLC v. United States, where the Middle District of Florida held that an IRS announcement created a substantive right in a taxpayer that was reviewable by the courts, would indicate such a denial could be appealed.   I’ve greatly oversimplified Kearney, which is a very dense case with lots of great procedural issues.  I believe Les will be writing about other aspects of that case shortly.  The issue of informal IRS statements creating taxpayer rights is touched upon in greater detail in IRS Practice and Procedure,  3.04[9].

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