Jul 16

First Time Abate

First Time Abate: The ‘Get Out of Tax Penalties Free’ Card

JULY 13, 2016
BY PAUL L. MANCINONE AND ALISON WALSH
paulmancinone
alison-walsh2

Most tax practitioners occasionally find themselves in the position of having to deal with clients who have received penalties for late filing of tax returns or late payment of income taxes.

As both a CPA and attorney, our office always has penalty abatement requests in process. Most penalty provisions of the Internal Revenue Code have reasonable cause language, so the penalty can at least be addressed with a good reasonable cause argument, assuming one exists. Those penalties involving “intentional” or “willful disregard” language, with considerably higher dollars at stake, tend to involve a more extensive plan of attack.

It’s safe to say most taxpayers who tend to heed the advice of quality preparers don’t find themselves in penalty situations very often. But wouldn’t it be great if there was a simple streamlined tool to abate penalties for otherwise diligent and responsible taxpayers? Well there is, and it’s been around since 2001! It’s an administrative waiver called “First Time Abate.”

A while ago, we wrote about Form 8275, Disclosure Memo, as a safety tool to avoid penalties by disclosing a position on a tax return for which the preparer and taxpayer believe they have reasonable basis, but are nonetheless not quite sure (see IRS Penalties: Speak Softly and Carry Form 8275). We were, and continue to be, astonished by the lack of use of this most valuable resource. First Time Abate is another penalty tool that we are surprised hasn’t yet become mainstream in tax practice.

In 2001, the Internal Revenue Service began granting penalty relief under an administrative waiver known as First Time Penalty Abate. It’s not in the Internal Revenue Code; it comes under the “Reasonable Cause Assistant” (RCA) of the IRS and it’s in the Internal Revenue Manual (IRM 20.1.1.3.6.1). Like many provisions of the Internal Revenue Manual (repetitive examination procedures, for example), First Time Penalty Abate availability is not well publicized by the IRS.

Here’s how it works. The IRM basically states that First Time Abate applies to penalties for late income tax filings (including partnerships and S corporations) and late income tax payments (including late deposits of tax). Such abatement may be granted as long as the taxpayer has a clean history (no penalty assessments) for the previous three years. The purpose behind First Time Abate relief is to reward past compliance and promote future compliance by utilization of this “get out of penalty free card.”

A clean history means a clean history, but some areas of the Internal Revenue Manual or other research are worthy of note. For example, the criteria includes “if current taxes are paid, or arranged to pay.” Well, “arranged to pay” means the IRS will consider the taxpayer current if an installment agreement is in existence, as long as the payment plan is in good standing. Thus, an installment agreement in good standing does not negate the possibility of relief under the First Time Penalty Abate administrative waiver. In addition, if there was a prior penalty in the previous three years, but it was removed due to reasonable cause, that activity should not count as a “prior penalty.” Thus the opportunity to be awarded this first time abatement is still applicable in that situation.

Our office simply requests this waiver by responding to the address on the penalty assessment letter, stating the taxpayer’s “good three year history” and a request that the “penalty be waived under First Time Penalty Abate Administrative Waiver.” Frankly, we try it with a whole variety of penalties, not just late filing and late payment of income tax returns, since First Time Abate is not quite “the law” and clearly discretionary. In addition, if one of the prior three years had an insignificant penalty, there is language in the IRM that suggests consideration, so we’d try in that case too, especially if we lack reasonable cause. Try.

In 2012, the Treasury Inspector General for Tax Administration pointed out that the IRS failed to inform about 1.45 million taxpayers that they qualified for this relief, resulting in $181 million in waivable penalties. TIGTA recommended the IRS ensure taxpayers are aware of this potential waiver. However, from what we see, this has not been the case. Most practitioners, as well as the vast majority of taxpayers, are not familiar with this most welcome opportunity.

Paul Mancinone is a CPA and attorney at law, and represents businesses and individuals before the IRS. Alison Walsh is an accountant and manager at his firm, Paul Mancinone Company, P.C., in Springfield, Mass.

 

 

Comments (3)

I know exactly what you mean tcalverley – I have had the same problem with the IRS giving us the “Congratulations – we have waived the penalty based only on your clean compliance history” when I have clearly explained that the small $60 (or whatever) penalty they have assessed was in error. They don’t listen and who wants to spend any more time on a small penalty like that – but if within three years from that, the taxpayer (for whatever reason) ends up with a large penalty, you better believe I’m going to fight tooth and nail to get First Time Abate for THAT penalty since they never should have issued the first penalty to begin with. So far we haven’t had to deal with this yet (i.e., we haven’t had the IRS erroneously use FTA for a penalty that THEY issued in error and then have another more substantial penalty within three year years that we needed to get them out of).

Also – by the way, I have had IRS agents/assistors tell me on the phone that when it comes to PAYMENTS they don’t have to use the postmark date. I know of taxpayers who have mailed their payments on the due date only to be smacked with interest and a penalty for filing late and when I called to say they were wrong because they mailed it on the due date, they said nope – they don’t have to go by the mailbox rule when it comes to payments.

Posted by CLEEA | Friday, July 15 2016 at 9:17AM ET
We have had several cases of taxpayers assessed penalty because of IRS errors in posting payments using the postmark date rather than received date as the payment date. We write to the IRS to explain the mailbox rule and ask that they correct the posting date. The IRS replies with a waiver based on the taxpayer’s “clean history” thereby using the first time abate when it is not appropriate. To date, it has been futile trying to convince the IRS that the taxpayer did not intend to use the first time abate and that the IRS error should be corrected (In much nicer wording).
Posted by tcalverley | Thursday, July 14 2016 at 6:22PM ET
I usually prefer to defend a penalty assertion or assessment by using a “reasonable cause” defense or other substantive defense before requesting a “first time abate.” I want to save that for when it’s really needed, rather than have my client waste it on what may be a minor penalty and then not have it when the stakes are much higher. However, because the cost of achieving success with first time abate may be much less than asserting a substantive defense, the client has to be made aware of the pros and cons of the alternatives. In many cases, the use of first time abate may be the preferred approach just based on the cost factor.
Posted by rwiener@dscpas.com | Thursday, July 14 2016 at 11:18AM ET
TaxPro Today

Apr 20

IRS Tax Updates

2016 Changes to EITC, Child Tax and Education Credits, and 2017 Filing Season Refund Delays for Returns with EITC

 

As the main part of the 2016 filing season comes to a close, it is time to emphasize the coming important changes to the preparer due diligence requirements, refundable credits, and refunds for the 2017 filing season.

The December 2015 extender bill did more than just extend the expiring tax provisions. In the Protecting Americans from Tax Hikes (PATH) Act of 2015, Congress included a “program integrity” section that dealt with the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and American Opportunity Education Tax Credit (AOTC).

Below is a summary of what these changes are:

Refunds for Federal Returns that Claim EITC will not be Released Until February 15 Beginning with the 2017 Filing Season
The integrity provision of the PATH Act that will have the greatest impact on taxpayers that claim EITC is the one that requires the IRS to not release refunds for returns that claim EITC or the Additional Child Tax Credit until February 15 beginning with the 2017 filing season. Therefore, any return claiming the EITC or CTC credits that is prepared in the early part of the filing season will not be released for up to 4 weeks (depending on when the return is filed) instead of the standard 21 days or less timeframe.

Expansion of Preparer Due Diligence Requirements
The PATH Act expands the EITC due diligence requirements under Code Section 6695 (including the $500 penalty) to now include the Child Tax Credit and the American Opportunity Education Credit beginning with 2016 individual federal returns.

This means that the IRS will be making changes to Form 8867 (Paid Preparer’s Earned Income Tax Credit Checklist). The form will be renamed and additional due diligence related questions will be added for these two additional credits.

The IRS is in the process of modifying the due diligence regulations for the addition of the Child Tax Credit and the American Opportunity Education Credit. When the IRS releases these regulations, we will give you more details on what they contain and what changes will be made to the Tax Year 2016 Form 8867.

Earned Income Tax Credit (EITC) Changes
The PATH Act made the following changes that will affect individuals who claim EITC on their returns beginning with Tax Year 2016 tax returns:

  • Individuals cannot file an amended return to claim EITC for prior years that a qualifying child did not have a Social Security Number. This provision went into effect on the date the PATH Act became law on December 18, 2015.
  • The IRS can bar an individual from claiming EITC for 10 years if the IRS finds they have fraudulently claimed the credit.
  • The EITC is now subject to the penalty for erroneous claim for refunds and credits.
  • Incorrectly claimed refundable credits will now be taken into account when determining the underpayment penalty.

Changes for Child Tax Credit and the American Opportunity Education Credit
The PATH Act made the following changes for returns that claim the child tax credit or the American Opportunity credit beginning with Tax Year 2016 tax returns:

  • If the IRS determines that an individual has intentionally disregarded the rules for claiming the Child Tax Credit and/or the American Opportunity Education Credit they can bar them for two years from claiming either or both of these credits.
  • Individuals cannot file an amended return to claim the Child Tax Credit or the American Opportunity Education Credit for prior years that a qualifying child did not have an ITIN or SSN.
  • The EIN of the educational institution will be required to be reported on Form 8863. If it is missing the IRS will reject the return.

Feb 11

Recent Funding Update

IRS Funding & Taxpayer Identity Verification

February 11, 2016 – An Update on IRS Funding Patterns

As of this morning, the IRS has paid approximately 70% of refunds related to taxpayers who filed within the first weeks of the season. That leaves approximately 30% of these taxpayer refunds yet to be paid by the IRS.

This year, the IRS has generally paid refunds on a weekly cycle in a large batch of refunds near the middle of each week. In the past few years, the IRS tended to pay more refunds on a daily cycle.

We expect another large batch of refunds to be released by the IRS sometime next week, most likely near the middle of the week. Many of the currently unfunded refunds are expected to be paid by the IRS in the next weekly batch.
IRS corner stone

Taxpayer Identity Verification

If you have Taxpayers that have not received their refund and it has been more than 21 days (or thereabouts) we strongly recommend having the Taxpayer call the IRS to verify their identity.

This identity verification may be the reason for the delayed funding.

 

The Taxpayer can verify their identity by using one of the following options:

Feb 05

IRS Resumes Processing Tax Returns

TaxProToday
WASHINGTON, D.C. (FEBRUARY 5, 2016)

The Internal Revenue Service said it resumed processing individual and business tax returns at approximately 5 p.m. Thursday following resolution of its system outage.


Many of the tools and applications came up earlier on Thursday morning, including “Where’s My Refund” on IRS.gov. The systems had been down since Wednesday.

“IRS teams worked throughout the night and around the clock on this system outage,” IRS Commissioner John Koskinen said in a statement. “Our processing systems are back in business. Taxpayers should see little, if any, impact on their tax returns or refunds. We apologize for the inconvenience this caused, and we appreciate the support and patience from taxpayers as well as our partners in the tax community and state revenue departments.”

The IRS emphasized that taxpayers do not need to take any additional steps or action due to the outage, including people who filed just before or during the outage. Throughout this period, taxpayers were able to continue to send their tax returns to their e-file provider; these companies have already started sending these tax returns into the IRS.

Taxpayers who have received a specific refund date from the “Where’s My Refund?” tool on IRS.gov should not be affected by the outage, the IRS noted. The IRS reminded taxpayers that many variables factor into the processing of tax refunds, including fraud prevention efforts, but we continue to anticipate that nine out of 10 taxpayers will receive their refunds within 21 days after being accepted by the IRS. In addition, the IRS pointed out that IRS.gov remains the best place to check for information on refunds. Additional information is available at https://www.irs.gov/Refunds/What-to-Expect-for-Refunds-This-Year

The IRS said it is continuing to examine the underlying cause of the outage yesterday as well as monitoring any follow-up issues. At this time, the IRS added, the situation appears to be a hardware failure.

Jan 28

Unusual Refund Patterns at IRS

As of 7am Eastern this morning, the IRS has still only released a small trickle of refunds so far this year. Never in the history of e-file have most early filers waited this long to receive their refund.

Wheres My RefundBy the end of today, the IRS is scheduled to release approximately 10% of refunds under $1000 which were filed prior to 1/23/2016. Tomorrow, the IRS is slated to release some additional refunds which were filed on 1/23 and 1/24. However, as is the case today, our information shows that the IRS will again release only approximately 10% of refunds under $1000 during that time period. Put another way, for the most part, the IRS has not yet released ANY refund over $1000.

This situation is nationwide, affecting all taxpayers and all tax preparers throughout the country. Based on our records, never in the recent past has the IRS waited this long to release the initial large batch of refunds related to early filers.

Keep in mind that it is still possible that additional refunds will be released by the IRS today or tomorrow other than those mentioned above. Also, it is likely that we will receive additional information over the next two days on when the remaining refunds will be released. If that occurs, I will let you know.

Dec 22

e-filing will open on Tuesday Jan 19th

 

Tax Time Approaches

Tax Time is Approaching!Zip refund

Are you ready?


The IRS announced that e-filing will open on Tuesday Jan 19th.

Tell your clients and get ready for another great tax season with Zip Refund.

Zip refund

 

Dec 18

PATH of 2015

Protecting Americans from Tax Hikes Act of 2015

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(the PATH Act) – 12-18-2015

 

Here is a list of key provisions.

Made permanent:

  • Enhanced Child Tax Credit
  • Enhanced American Opportunity Tax Credit
  • Enhanced Earned Income Tax Credit
  • IRA-to-charity — California automatically conforms
  • R&D credit
  • IRC §179 — enhanced
  • Above-the-line educator deduction
  • Sales tax deduction
  • Built-in gains holding period
  • Enhanced mass transit and parking pass benefits
  • Enhanced exclusion of gain on sale of small business stock

 

PATH

Extended through 2016:

  • Qualified tuition deduction
  • COD principal residence exclusion
  • Mortgage insurance premium deductible as interest
  • Nonbusiness Energy Property Credit

 

Extended through 2019:

  • First year bonus depreciation on automobiles
  • Bonus depreciation — phases out
  • Work Opportunity Tax Credit

Dec 14

Identity protection tips

 

Seven Steps for Making Identity Protection Part of Your Routine

Zip refund

IRS Security Awareness Tax Tip Number 3, December 7, 2015 Español

 

The theft of your identity, especially personal information such as your name, Social Security number, address and children’s names, can be traumatic and frustrating. In this online era, it’s important to always be on guard.

The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.

Here are seven steps you can make part of your routine to protect your tax and financial information:

  1. Read your credit card and banking statements carefully and often – watch for even the smallest charge that appears suspicious. (Neither your credit card nor bank – or the IRS – will send you emails asking for sensitive personal and financial information such as asking you to update your account.)
  2. Review and respond to all notices and correspondence from the Internal Revenue Service. Warning signs of tax-related identity theft can include IRS notices about tax returns you did not file, income you did not receive or employers you’ve never heard of or where you’ve never worked.
  3. Review each of your three credit reports at least once a year. Visit annualcreditreport.com to get your free reports.
  4. Review your annual Social Security income statement for excessive income reported. You can sign up for an electronic account at www.SSA.gov.
  5. Read your health insurance statements; look for claims you never filed or care you never received.
  6. Shred any documents with personal and financial information. Never toss documents with your personally identifiable information, especially your social security number, in the trash.
  7. If you receive any routine federal deposit such as Social Security Administrator or Department of Veterans Affairs benefits, you probably receive those deposits electronically. You can use the same direct deposit process for your federal and state tax refund. IRS direct deposit is safe and secure and places your tax refund directly into the financial account of your choice.

To learn additional steps you can take to protect your personal and financial data, visit Taxes. Security. Together. You also can read Publication 4524, Security Awareness for Taxpayers.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Additional IRS Resources:

  • IRS Commissioner Koskinen’s Statement on the Security Summit Group Public Awareness Campaign
  • Taxpayer Guide to Identity Theft
  • Publication 5027, Identity Theft Information for Taxpayers
  • www.irs.gov/identitytheft — Identity Protection: Prevention, Detection and Victim Assistance
  • IR-2015-129, IRS, States and Tax Industry Announce New Steps to Help Public to Protect Personal Tax Data
  • Fact Sheet 2015-23, IRS, States and Industry Partners Provide Update on Collaborative Fight Against Tax-Related Identity Theft
  • IRS and Partner Statements on the October 2015 Security Summit Meeting

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Oct 30

IRS Lowers Amount for PTIN Number

The IRS recently announced that it will be charging less for PTIN (Preparer tax identification number) registration and renewals. The PTIN is required to be a paid tax preparer so this is good news for all tax preparers. Instead of the usual $63 it will now only cost $50 for the upcoming 2016 tax season.

Learn more about this and other upcoming changes at the IRS site for tax professionals.

.irs lowers ptin cost

Aug 05

Tax filing problems could jeopardize health law aid for 1.8M

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