A little-known provision within the Internal Revenue Manual (IRM) allows for the abatement of late filing and late payment penalties if a taxpayer was in compliance for the prior three years and had not previously had a penalty abated under this “first-time abate” provision. In a recent report, the Treasury Inspector General took the IRS to task for not publicizing and acting on this IRM policy. Abatement of the late filing and late payment penalties can result in some significant savings for taxpayers who are or have been subject to those penalties.
Late Filing and Late Payment Penalties – These penalties are assessed because a taxpayer did not timely file and did not pay the tax owed. The combined penalty is 5% of the unpaid tax for each month or part of a month the return is late, but not for more than 5 months. The late filing penalty is reduced by the late payment penalty. Thus, the 5% includes a 4 1/2% penalty for filing late and a 1/2% penalty for paying late. The 25% combined maximum penalty includes 22 1/2% for filing late and 2 1/2% for paying late. The 1/2% penalty for paying late is not limited to 5 months. This penalty will continue to increase to a maximum of 25% until the taxpayer pays the tax in full. The maximum 25% penalty for paying late is in addition to the maximum 22 1/2% late filing penalty for a total penalty of 47 1/2%. If a return is not filed within 60 days of the due date, the minimum penalty is $135 ($100 for returns required to be filed before January 1, 2009) or 100% of the balance of the tax due on the return, whichever is smaller.
Penalties can be also abated or reduced for reasonable cause. However, when abatement is requested for reasonable cause and the taxpayer also qualifies under the “first-time abate” policy, the “first-time abate” is applied first.
Penalty relief under the “first-time abate” provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
If you have been subject to and paid a late filing and/or late payment penalty, you may be entitled to have the penalty abated and refunded. Please contact this office if you believe you qualify for penalty abatement or if you have additional questions.