The sheer volume of the Internal Revenue Code may imply that every hypothetical tax issue has been anticipated. Yet murky areas do arise. Fortunately, IRS personnel have opportunities to apply discretion in certain cases.
One example is the “First Time Penalty Abate.” The provision is actually a type of administrative waiver that has been around since 2001. Authority is found in Section 20 of the Internal Revenue Manual.
To be eligible, a taxpayer’s record generally must be free of any late income tax filings or payments within the past three tax years. In addition, a taxpayer’s record must be clean regarding penalty assessments. The rationale is to reward prior tax compliance and encourage similar good behavior in the future. Notably, a taxpayer in this instance could be an individual, a partnership or an S corporation.
Are there any gray areas? Of course. For starters, the provision is discretionary, not automatic. A taxpayer generally must specifically request its application. In fact, an observation by the Treasury Inspector General for Tax Administration concluded that around 1.45 million taxpayers subject to U.S. income tax might have qualified for the provision in 2012, had they known about it. That amounted to around $181 million in penalties that might have been waived.
In addition, certain denial situations may warrant a second look, such as a penalty within the last three years that was later removed. The moral of this story is that a taxpayer can often benefit from a consultation with a law firm that focuses on tax law, even in unexpected ways.
Source: Accounting Today, “First Time Abate: The 'Get Out of Tax Penalties Free' Card,” Paul L. Mancinone and Alison Walsh, July 13, 2016