Getting out from under tax penalties, pt 1: first-time abatement

The IRS is much more apt to use sticks than carrots to encourage tax compliance. And one of the most frequently used sticks is to hit you with tax penalties.

Fortunately, you don’t have to just roll over and accept the hit. Taxpayers have every right to contest tax penalties – and often succeed in doing so.

In this two-part post, we will discuss scenarios in which this is possible. We’ll start with something called first-time penalty abatement.

Abatement may seem like a fancy-sounding word. And indeed, it does carry some ambiguity. Depending on the context, it can mean removal of the penalty or reduction of the penalty.

The bottom line, however, is that the IRS has a policy of removing penalties when you can show reasonable cause for doing so.

Another way to put this is that the IRS will waive penalties in certain situations when there is a good reason to do so. One of those situations is when a taxpayer with a strong compliance history runs into penalties for the first time.

Since 2001, the IRS has been allowing penalty relief in this situation. It is called first-time penalty abatement. Though not formally listed in the tax code, this type of relief is clearly stated in the Internal Revenue Manual.

First-time penalty abatement may be available if you meet certain criteria. This typically includes not having had any tax penalties in the previous three tax years. You must also either pay, or make arrangements to pay (such as with an installment agreement) any tax due.

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