Ask The California Employment Tax And Payroll Tax Attorney – All About Irs “First Time” Penalty Abatement
By Robert S. Schriebman
Taxpayers who do not file their IRS tax return on time, or do not remit a timely payment, are subject to late filing and late payment penalties. These penalties, together with daily compounding interest, may add up to 40% of the overall assessment. Abating these penalties will result in significant savings.
Most people when faced with these penalties, just pay them and are done with it. If they only knew there was a little-known IRS policy that allows for “first time” penalty abatements. The term “first time” is not to taken literally; it is not a once-in-a-lifetime favor. If one has been in compliance with filing and payment requirements over the past three years, one has complied with “first time” eligibility. The recent US Tax Court case of Thomas E. Kelly explains these rules clearly and gives all of us a road map of how we can remove or abate these pesky penalties. Many accountants and tax return preparers are aware of this rule, but they don’t know how to find it in the vast sea of IRS statutes, regulations, and rulings.
In this article I will discuss the Kelly case and point you to the specific location of this obscure policy. Thomas E. Kelly v. Commissioner (TC Memo. 2022-73, July 13,2022)
The Case of Thomas E. Kelly v. Commissioner
Thomas is a securities broker in New York City. Every year in issue he earned between $1 million and $2 million annually. The problem – Thomas did not like to file returns or pay his taxes. In 2017 and 2018 he eventually filed his tax returns for 2013, 2014 and 2015. As of September 2019, his outstanding liabilities for these years exceeded $2.5 million! The IRS sent him the usual series of collection notices including his right to file a Collection Due Process (CDP) petition. He filed his CDP petition, and his case was assigned to an IRS Settlement Officer (SO). During his CDP conference he requested “first time” penalty abatement under an IRS Administrative Policy. The SO turned his request down because he was not in compliance for the past three years. The Tax Court agreed with the SO and refused to grant Thomas “first time” penalty abatement relief.
“First Time Abatement” Penalty Rules and Where to Find Them
Under this Administrative Policy, the IRS offers an administrative waiver of certain additions to assessed taxes. Where are these rules located? The policy is found in the Internal Revenue Manual (IRM) at 126.96.36.199.3.2.1 (Nov. 21, 2017). The EDD and the FTB have no such policy. To qualify for this waiver, the taxpayer must not have any unreversed additions to his/her taxes for any of the preceding three years. See also Love v. Commissioner (118 TCM 96). The Tax Court judge reviewed Thomas’ account transcripts showing that for 2012 he was assessed late penalties and that none of these assessments was abated or reversed. Thomas did not qualify for first time abatement relief.
Now you know all about “first time” penalty abatements and where to find the rules in the Internal Revenue Manual. One more point – you gotta ask for this relief. The IRS will not volunteer this information. So, if you don’t ask, you don’t get.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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