CTRS CTRS Penalty Abatement and Relief 2 — Questions and Answers
Question 1: What is the Failure to File (FTF) penalty rate and maximum amount?
- 5% per month or part thereof, up to a maximum of 25% of the unpaid tax (Correct answer)
- 1% per month up to 10% of the unpaid tax
- 10% per month up to 25% of the unpaid tax
- 0.5% per month up to 25% of the unpaid tax
Correct answer: 5% per month or part thereof, up to a maximum of 25% of the unpaid tax
The FTF penalty under IRC §6651(a)(1) is 5% of the unpaid tax for each month or part of a month the return is late, capped at 25% of the unpaid tax.
Question 2: What happens when both the FTF and FTP penalties apply in the same month?
- The FTP penalty is reduced by the amount of the FTF penalty, so the combined rate is 5% per month rather than 5.5% (Correct answer)
- Both penalties apply at full rates, resulting in a combined 5.5% per month
- The FTF penalty is suspended entirely when the FTP penalty is also in effect
- The IRS assesses only the higher of the two penalties
Correct answer: The FTP penalty is reduced by the amount of the FTF penalty, so the combined rate is 5% per month rather than 5.5%
When both FTF and FTP apply in the same month, the FTP penalty (0.5%) is subtracted from the FTF penalty (5%), resulting in a net monthly rate of 5% rather than 5.5%.
Question 3: What is the 'reliance on professional advice' standard for reasonable cause penalty abatement?
- The taxpayer must show they disclosed all relevant facts to a qualified tax professional and reasonably relied on the professional's advice, even if the advice was wrong (Correct answer)
- The taxpayer must prove the professional was licensed and in good standing
- The taxpayer must show the professional's advice was correct under then-current law
- Any written advice from a non-IRS professional automatically establishes reasonable cause
Correct answer: The taxpayer must show they disclosed all relevant facts to a qualified tax professional and reasonably relied on the professional's advice, even if the advice was wrong
Reliance on professional advice establishes reasonable cause when the taxpayer fully disclosed relevant facts to a competent professional and reasonably relied on the advice received, regardless of whether the advice was ultimately correct.
Question 4: What is the 'penalty abatement cascade' strategy practitioners use?
- Applying FTA to the most recent eligible year first, then using reasonable cause for earlier years to preserve the FTA option for future use (Correct answer)
- Requesting abatement of all penalties simultaneously to maximize the total amount abated
- Filing amended returns for all open years before requesting any penalty abatement
- Using OIC to abate penalties before filing an installment agreement for the remaining tax
Correct answer: Applying FTA to the most recent eligible year first, then using reasonable cause for earlier years to preserve the FTA option for future use
The cascade strategy involves using FTA for the most recent eligible tax year first, which clears that year from the 3-year lookback, potentially making prior years eligible for FTA in subsequent requests.
Question 5: What is the Accuracy-Related Penalty under IRC §6662 and what is its rate?
- A 20% penalty on the portion of an underpayment attributable to negligence, substantial understatement, or other enumerated causes (Correct answer)
- A 10% penalty on any underpayment discovered during an audit
- A 25% penalty on all underreported income
- A 40% penalty on tax shelters and listed transactions
Correct answer: A 20% penalty on the portion of an underpayment attributable to negligence, substantial understatement, or other enumerated causes
The IRC §6662 Accuracy-Related Penalty is 20% of the underpayment attributable to negligence, substantial understatement of income tax, or other specified causes, doubling to 40% for gross valuation misstatements.
Question 6: How does the IRS's 'systemic abatement' differ from a manual penalty abatement request?
- Systemic abatement is automatically applied by IRS computer systems under specific criteria (like FTA), while manual abatement requires a practitioner to formally request relief (Correct answer)
- Systemic abatement is less favorable because it applies only the minimum reduction
- Manual abatement is processed faster than systemic abatement
- Systemic abatement requires IRS supervisor approval while manual does not
Correct answer: Systemic abatement is automatically applied by IRS computer systems under specific criteria (like FTA), while manual abatement requires a practitioner to formally request relief
Systemic abatement refers to penalties that IRS computer systems automatically remove when certain programmatic criteria are met, while manual abatement requires a formal written request evaluated by an IRS representative.
CTRS CTRS Penalty Abatement and Relief 2
What is the Failure to File (FTF) penalty rate and maximum amount?