The IRS may formally interpret or clarify a provision to provide administrative relief from a penalty that would otherwise be assessed. An administrative waiver may be addressed 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. An administrative waiver may be necessary when there is a delay by the IRS in printing or mailing forms, publishing guidance (e.g., writing Regulations), or other conditions. The IRS may also waive penalties under the first time abate relief, or for undue hardship, erroneous advice, casualty, a correction of an IRS error, all of which are discussed further below.
First Time Abate
First implemented in 2001, the IRS offers an administrative waiver of certain penalties when the taxpayer, for the first time, is subject to one or more penalties for a single return.[1] These penalties include the failure to file (FTF) penalty under IRC § 6651(a)(1), IRC § 6698(a)(1), or IRC § 6699(a)(1); the failure to pay (FTP) penalty under IRC § 6651(a)(2) and/or IRC § 6651(a)(3); and the failure to deposit (FTD) penalty under IRC § 6656. First Time Abate is available for penalty relief the first time a taxpayer is subject to one or more of the referenced penalties for a single return. However, even when the first time abate criteria have otherwise been met, the IRS will not provide penalty relief under the first time abate waiver unless the taxpayer has filed, or filed a valid extension for, all required returns currently due, AND the taxpayer has paid, or arranged to pay, any tax currently due.[2]
First Time Abate Eligibility Criteria
In order for the IRS to consider a first time abate request, the tax period ending date must be later than Dec. 31, 2000, and the taxpayer has not been required to file the same return for the 3 years preceding the penalized tax period. If the taxpayer was required to file the same return during the preceding 3 years, the taxpayer has no unreversed penalties (except an estimated tax penalty) for those preceding 3 years.
When determining if first time abate criteria are met, the taxpayer(s) must meet first time abate criteria on all returns required to be filed as a primary and secondary taxpayer, if applicable. For example, if the filing status of the return on 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, first time abate criteria for both SSNs must be met. With respect to businesses, first time abate is not available if the failure to deposit penalty has been waived four or more times.
In addition, penalty relief under the FTA waiver does not apply to returns with an event-based filing requirement, generally returns filed once or infrequently such as Form 706, U.S. Estate Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return; nor does it apply to the daily delinquency penalty, under IRC § 6652(c)(2)(A).[3] Finally, the first time abate waiver does not apply to information reporting that is dependent on another filing, such as penalties assessed against a late or unfiled Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations).[4]
Not Penalty Specific
A first time abate waiver is not “penalty-specific.” In other words, if the taxpayer has any unreversed penalties[5] in the three-year look-back period, the first time abate waiver does not apply to any penalty under consideration. For example, if a taxpayer was assessed a failure to deposit penalty and no other penalties on Form 941 for tax period 201703 and a review of the three-year look-back period shows an unreversed failure to pay penalty, the first time abate waiver does not apply for 201703.
Applies Before Reasonable Cause
Penalty relief under administrative waivers, including first time abate, is to be considered and applied before reasonable cause. If first time abate criteria are met, the first time abate waiver will be applied before reasonable cause, and the IRS must notify the taxpayer that the IRS removed the taxpayer’s penalty or penalties based on its prior history of compliance and not based on its reasonable cause statement.
Does not Apply when Clear Error is Present
The IRS should not provide relief under the first time abate 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. Because the first time abate waiver will apply only once, it would not be fair to a taxpayer to “abate” a clearly erroneous penalty.
Undue Hardship
An undue hardship may support the granting of an extension of time for paying a tax or deficiency, and a taxpayer may apply for such an extension by using a Form 1127 (Application for Extension of Time for Payment of Tax Due to Undue Hardship). Importantly, Treas. Reg. § 1.6161-1(b), provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that he or she would sustain a substantial financial loss if required to pay a tax or deficiency on the due date. It should be noted that undue hardship generally does not affect a person’s ability to file and therefore would not provide a basis for penalty relief in a failure to file situation.[6] However, the IRS considers each request on a case-by-case basis. The extension of time to pay does not provide the taxpayer with an extension of time to file. Nor does the extension of time to pay relieve the taxpayer of any appropriate penalties.[7]
Undue hardship may also support relief from the addition to tax for failure to pay tax if the explanation for the noncompliance supports such a determination. However, the mere inability to pay does not ordinarily provide the basis for granting penalty relief. Under Treas. Reg. § 301.6651–1(c), the taxpayer must also show that he or she exercised ordinary business care and prudence in providing for the payment of the tax liability. The taxpayer may claim that enough funds were on hand, but as a result of unanticipated events, the taxpayer was unable to pay the taxes.
IRS Considerations
The IRS will consider an individual taxpayer’s inability to pay a factor when considering penalty relief if the taxpayer shows that, had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. § 1.6161–1(b)) would have resulted. In the case where a taxpayer files bankruptcy, the IRS will consider inability to pay a factor if the insolvency occurred before the tax payment due date. Further, the IRS will consider when the taxpayer knew it couldn’t pay; why the taxpayer was unable to pay; whether the taxpayer explored other means to secure the necessary funds; whether the taxpayer paid when the funds became available; and what the taxpayer supplied in the way of supporting documentation, such as copies of bank statements, to its application for an undue hardship waiver.
No Undue Hardship Waiver for Trust Fund Recovery Penalty
Undue hardship does not support relief from the trust fund recovery penalty under IRC § 6672. If payroll was met, taxes were withheld and should be available for deposit. Employers must reserve money withheld from employees’ wages in trust until deposited. The employer should not use the money for any other purpose.
Advice
The IRS recognizes three basic types of advice that may qualify for statutory, regulatory, or administrative penalty relief: (a) written advice provided by IRS; (b) oral advice provided by IRS; and (c) advice provided by a tax professional. The IRS considers whether the advice was given in response to a specific request and was the advice received related to the facts contained in that request, as well as whether the taxpayer reasonably relied on the advice.
A taxpayer will not be considered to reasonably rely on advice regarding an item included on a return if the advice was received after the date the return was filed. A taxpayer may not be considered to have reasonably relied on written advice unrelated to an item included on a return, such as advice on the payment of estimated taxes, if the advice is received after the estimated tax payment was due.
If the taxpayer, or his or her authorized representative, provided the IRS or the tax professional with adequate and accurate information, the taxpayer is entitled to penalty relief for the period during which he or she relied on the advice. The period continues until the taxpayer is placed on notice that the advice is no longer correct or no longer represents the IRS’s position.
When a Taxpayer is Placed on Notice of Advice Changes
The taxpayer is placed on notice as the result of any of the following events that present a contrary position and occur after the issuance of the written advice: (a) written correspondence from the IRS that its advice is no longer correct or no longer represents the IRS’s position; (b) enactment of legislation or ratification of a tax treaty; (c) a U.S. Supreme Court decision; (d) the issuance of temporary or final regulations; and (e) the publication of a revenue ruling, revenue procedure, or other statement in the Internal Revenue Bulletin.
Abatement Request Unnecessary
Generally, Form 843 (Claim for Refund and Request for Abatement) is required to be filed to request penalty abatement based on erroneous written advice by the IRS. However, if Form 843 is not filed and the information provided demonstrates that abatement of the penalty is warranted, the penalty should be abated, whether or not a Form 843 is provided. Information required to be provided includes (a) the taxpayer’s written request for advice; (b) the erroneous written advice furnished by the IRS to the taxpayer and relied on by the taxpayer; and (c) the report (if any) of tax adjustments that identifies the penalty or addition to tax and the item relating to the erroneous written advice.
Written Advice from the IRS
The IRS is required by IRC § 6404(f) and Treas. Reg. § 301.6404–3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the IRS acting in his or her official capacity. If, however, the taxpayer does not meet the criteria for penalty relief under IRC § 6404(f), the taxpayer may qualify for other penalty relief. For instance, taxpayers who fail to meet all of the IRC § 6404(f) criteria may still qualify for relief under reasonable cause if the IRS determines that the taxpayer exercised ordinary business care and prudence in relying on the IRS’s written advice.[8]
Requests that qualify for penalty relief based on erroneous written advice from the IRS under IRC § 6404(f) must be filed according to the following under Treas. Reg. § 301.6404-3(e), meaning that they must be filed within the period allowed for collection of the penalty or addition to tax, or if the penalty or addition to tax has been paid, within the period allowed for claiming a credit or refund of such penalty or addition to tax.
Oral Advice from the IRS
The IRS may provide penalty relief based on a taxpayer’s reliance on erroneous oral advice from the IRS where the penalty allows relief for reasonable cause. The IRS is required by IRC § 6404(f) and Treas. Reg. § 301.6404–3 to abate any portion of any penalty attributable to erroneous written advice furnished by an employee acting in his or her official capacity. Administratively, the IRS has extended this relief to include erroneous oral advice when appropriate.
Advice from a Tax Advisor
Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC § 6664(c) for the accuracy-related penalty under IRC § 6662.[9] However, in very limited instances, reliance on the advice of a tax advisor may provide relief from other penalties when the tax advisor provides advice on a substantive tax issue. For example, an employer researched all available IRS publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were “contract labor” or “employees.” As a result, the tax advisor advised the employer that the workers were “contract labor.” However, the IRS later determined that the workers were “employees” and not “contract labor.”
Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer’s responsibility to file, pay, or deposit taxes generally cannot be excused by reliance on the advice of a tax advisor. Because the IRC and treasury regulations sections that provide penalty relief criteria for erroneous advice from a tax advisor are generally limited to the accuracy-related penalty, relief from other penalties must meet the reasonable cause standards.[10]
Correction of IRS Error
An IRS error can be any error made by the IRS in computing or assessing tax, crediting accounts, etc. IRS errors include (a) a math error when manually computing a penalty; (b) an extension of time to file that was not recorded properly; (c) any other error, when it can be shown that the taxpayer did in fact comply with the law, and the IRS did not initially recognize that fact.
Footnotes:
[1] See IRM 20.1.1.3.3.2.1.
[2] Although reported as a tax on Form 1040, this payment requirement does not include an unpaid Shared Responsibility Payment (SRP) applicable under IRC 5000A(b).
[3] See IRM 20.1.8 (Employee Plans and Exempt Organization Penalties).
[4] See IRM 20.1.9 (International Penalties).
[5] Except a shared responsibility payment.
[6] Undue hardship may establish reasonable cause for failure to file on magnetic media under Treas. Reg. § 301.6724–1. See IRM 20.1.7 (Information Return Penalties).
[7] See IRM 20.1.2.2.3.2 (Extensions of Time to Pay IRC 6161).
[8] See IRM 20.1.1.3.2.2.5 (Erroneous Advice or Reliance).
[9] See IRM 20.1.5.7.4 (Reliance on Advice); see also Treas. Reg. 1.6664–4(c).
[10] See IRM 20.1.1.3.2 (Reasonable Cause).
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