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If you file an income tax return late, Code §6651(a)(1) imposes a penalty of 5% of the unpaid taxes for each month, up to 25%. If you don't pay income taxes when due, Code §6652(a)(2) imposes a 0.5% penalty for each of nonpayment, up to 25% of the unpaid taxes.
Since 2001, the IRS grants relief to taxpayers subject to these penalties if the taxpayers were otherwise fully compliant for the prior three years. See IRM §20.1.1.3.6.1. This is known as "First-Time Abate" (FTA) relief. Note that it can only be applied for one tax year.
Did you know about this? Don't feel bad if you don't. In a recent report by the Treasury Inspector General for Tax Administration, the IRS has failed to inform about 1.45 million taxpayers that qualified for relief under the program, and collected around $181 million in penalties from those taxpayers. Information on the program is not well-publicized on the IRS' website, nor in forms or penalty notices. Since the IRS does not generally advise taxpayers of the program, and only grants relief if request, if a taxpayer does not know about FTA then they missed out on the opportunity to avoid these penalties. These are not small numbers either - the average estimated penalties per taxpayer are $60,000 for late filing and $21,000 for late payment.
Another problem with the program has been that the above penalties can also be abated if the taxpayer can show reasonable cause. If a penalty is abated due to reasonable cause, the taxpayer can then use FTA in a following year. However, taxpayers may use FTA in a year even though they qualified for reasonable cause abatement. By using FTA instead of reasonable cause abatement, they have locked themselves out of using FTA for the next few years when they didn't have to.
The IRS has indicated it will be taking corrective action to address these problems with the FTA program.
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