When is first-time penalty abatement worth looking at for an old balance due?

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AcadiFi · Accepted Answer

First-time penalty abatement can be relevant when the taxpayer has a clean compliance history for the required lookback period and is dealing with certain penalties for a particular year. It is not a magic eraser for every charge on the account, but it can reduce some failure-to-file, failure-to-pay, or failure-to-deposit penalties when the eligibility rules are met.

Suppose Alder Ridge Services receives a notice showing $6,200 due, including $650 of unpaid tax, $2,100 of interest, and $3,200 of penalties. If the taxpayer was otherwise compliant in the prior years and the current issue qualifies, first-time penalty abatement may help reduce part of the penalty portion. It would not erase the base tax, and it generally would not erase interest that accrued on the unpaid tax.

The EA takeaway is to separate the account into tax, penalty, and interest before discussing relief. A transcript review also helps show whether first-time abatement, reasonable-cause relief, or no relief is the better request. Then ask whether the penalty type qualifies and whether the prior compliance history supports the request. A lot of confusion comes from talking about the entire bill as if every dollar is equally negotiable. Practice more in our EA question bank.

When is first-time penalty abatement worth looking at for an old balance due?

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