Penalty Abatement: Getting Penalties Removed

Why This Matters for the Exam

Penalty abatement is a practical skill that every EA needs. The exam tests your knowledge of when abatement is available, what qualifies as reasonable cause, and the First Time Abatement (FTA) administrative waiver.

Expect at least 2-4 questions on the FTA criteria and examples of reasonable cause.

Understanding IRS Penalties

Before discussing abatement, it's important to understand the common penalties:

Note: FTF and FTP run concurrently. If both apply, FTF is reduced by FTP. Combined max for FTF+FTP over 5 months = 25% + 22.5% = 47.5%.

Method 1: First Time Abatement (FTA)

FTA is an administrative waiver that removes FTF, FTP, and FTD penalties for taxpayers with a clean compliance history. It's not in the Internal Revenue Code—it's an internal IRS policy (IRM 20.1.1.3.6.1).

FTA Eligibility Requirements

"Prior 3 Tax Years" Example: To get FTA for Tax Year 2024, the taxpayer must be penalty-free for Tax Years 2021, 2022, and 2023.

Penalties Covered by FTA

• ✅ Failure to File (FTF)
• ✅ Failure to Pay (FTP)
• ✅ Failure to Deposit (FTD)
• ❌ Accuracy-Related Penalties (not covered)
• ❌ Fraud Penalties (not covered)

How to Request FTA

1. By Phone: Call 800-829-1040 and ask for FTA. The IRS representative can apply it immediately if eligible.
2. By Letter: Write to the IRS service center with a request citing "First Time Abatement Relief."
3. Automated Application: For Tax Year 2024, the IRS may automatically apply FTA for eligible taxpayers. However, practitioners should still verify and request if not applied.

Practitioner Tip: Always check if FTA applies before arguing reasonable cause. FTA is easier to get and doesn't require documentation.

Method 2: Reasonable Cause

If FTA doesn't apply (or the penalty isn't covered), the taxpayer can request abatement based on reasonable cause.

The Standard: "Ordinary Business Care and Prudence"

The taxpayer must show they exercised ordinary business care and prudence but were still unable to comply with the tax obligation.

Factors the IRS Considers:

• What circumstances caused the failure?
• Could the taxpayer have anticipated the problem?
• Did the taxpayer take steps to comply once the problem was resolved?
• Has the taxpayer had similar problems in the past?

Examples of Valid Reasonable Cause

Examples That Are NOT Reasonable Cause

Key Distinction: Lack of funds is generally NOT reasonable cause for failure to file, but it may mitigate failure to pay if the taxpayer filed on time and made good-faith efforts to pay.

Requesting Reasonable Cause Abatement

Documentation Required:

• Explanation of what happened and why it prevented compliance.
• Supporting evidence (medical records, fire reports, death certificates).
• Timeline showing when the event occurred and when compliance became possible.
• Evidence of steps taken to comply once the impediment was removed.

Where to Send:

• Respond to the penalty notice by mail to the address shown.
• Or use Form 843 (Claim for Refund and Request for Abatement) if the penalty has already been paid.

FTA vs. Reasonable Cause Comparison

Real-World Scenario

Scenario: A taxpayer filed her 2024 return on October 20, 2025 (after the April 15 and extension deadline). She had no extensions. The IRS assessed a Failure to File penalty of $500.

• Can she get FTA? Check if she had no penalties for 2021, 2022, and 2023. If clean, she can call the IRS and request FTA by phone.
• Can she claim Reasonable Cause? Only if she has a valid explanation (e.g., hospitalized September-October 2025). "I forgot" won't work.

On the Exam

Expect 2-4 questions on penalty abatement, typically:

1. FTA Eligibility: "How many prior years must be penalty-free for FTA?"
2. Reasonable Cause Examples: "Which of the following is reasonable cause?"
3. Documentation: "What must a taxpayer show to claim reasonable cause?"

The key is to remember: FTA = 3-year clean history, covers FTF/FTP/FTD. Reasonable Cause = Ordinary business care and prudence.