CTRS CTRS Penalty Abatement and Relief 1 — Questions and Answers
Question 1: What are the three most common IRS civil penalties that CTRS practitioners seek to abate?
- Failure to File (FTF), Failure to Pay (FTP), and Failure to Deposit (FTD) (Correct answer)
- Civil Fraud Penalty, Accuracy-Related Penalty, and Substantial Understatement Penalty
- Estimated Tax Penalty, Late Payment Penalty, and Frivolous Return Penalty
- FBAR Penalty, Foreign Tax Credit Penalty, and Passive Activity Penalty
Correct answer: Failure to File (FTF), Failure to Pay (FTP), and Failure to Deposit (FTD)
The three most commonly abated penalties in tax resolution practice are the Failure to File penalty (IRC §6651(a)(1)), Failure to Pay penalty (IRC §6651(a)(2)), and Failure to Deposit penalty (IRC §6656).
Question 2: What is the 'reasonable cause' standard for penalty abatement?
- The taxpayer exercised ordinary business care and prudence in meeting their tax obligations but was unable to comply due to circumstances beyond their control (Correct answer)
- The taxpayer had a good faith belief that they did not owe the tax
- The taxpayer relied on incorrect advice from a non-tax professional
- The taxpayer's income was below the filing threshold
Correct answer: The taxpayer exercised ordinary business care and prudence in meeting their tax obligations but was unable to comply due to circumstances beyond their control
Reasonable cause for penalty abatement requires showing that the taxpayer exercised ordinary business care and prudence but was still unable to comply due to circumstances beyond their control.
Question 3: What is First Time Abatement (FTA) and what are its eligibility requirements?
- An administrative waiver available to taxpayers with a clean compliance history (no penalties in the prior 3 years) for failure-to-file, failure-to-pay, or failure-to-deposit penalties (Correct answer)
- A one-time penalty reduction of 50% available to any taxpayer regardless of compliance history
- A statutory waiver codified in the IRC for taxpayers who file amended returns
- A waiver available only to taxpayers who enter into installment agreements
Correct answer: An administrative waiver available to taxpayers with a clean compliance history (no penalties in the prior 3 years) for failure-to-file, failure-to-pay, or failure-to-deposit penalties
FTA is an administrative penalty waiver for taxpayers who have had no penalties in the 3 prior tax years, have filed required returns, and are in payment compliance for the current year.
Question 4: What IRS form is used to formally request abatement of a penalty?
- Form 843 (Claim for Refund and Request for Abatement) (Correct answer)
- Form 1040-X (Amended U.S. Individual Income Tax Return)
- Form 9465 (Installment Agreement Request)
- Form 12153 (Request for a Collection Due Process Hearing)
Correct answer: Form 843 (Claim for Refund and Request for Abatement)
Form 843 is the standard form for requesting abatement of penalties and interest, or for claiming a refund of penalties already paid.
Question 5: What is the 'statutory exception' basis for penalty abatement?
- Congress has written specific exceptions into the tax code that automatically prevent certain penalties, such as the estimated tax penalty safe harbors (Correct answer)
- A court ruling that a specific penalty violates constitutional protections
- An IRS policy allowing automatic abatement for first-year taxpayers
- An exception available only when the tax liability is disputed in Tax Court
Correct answer: Congress has written specific exceptions into the tax code that automatically prevent certain penalties, such as the estimated tax penalty safe harbors
Statutory exceptions are specific provisions in the Internal Revenue Code that exempt taxpayers from penalties under defined circumstances, such as the estimated tax payment safe harbor provisions.
Question 6: Can a taxpayer claim both First Time Abatement and reasonable cause for the same tax period?
- Yes, if FTA is not available, the practitioner should always consider reasonable cause as an alternative argument (Correct answer)
- No, only one abatement theory can be asserted per tax period
- Yes, both can be claimed simultaneously and the IRS will apply whichever is more favorable
- No, FTA permanently bars reasonable cause claims for the same period
Correct answer: Yes, if FTA is not available, the practitioner should always consider reasonable cause as an alternative argument
FTA and reasonable cause are alternative arguments; if FTA is not available (e.g., the taxpayer has prior penalties), reasonable cause should be evaluated and argued separately.
CTRS CTRS Penalty Abatement and Relief 1
What are the three most common IRS civil penalties that CTRS practitioners seek to abate?