The IRS uses the Reasonable Cause Assistant (RCA), which is an interactive software program, when considering penalty relief due to reasonable cause. The RCA provides a penalty relief option for the failure to file, pay, or deposit penalties if the taxpayer has not had to file the return before or no penalties have been assessed in the prior three years. The First Time Abate (FTA) waiver can only apply to a single tax period. If the taxpayer requests penalty relief for multiple tax periods and the earliest period meets FTA criteria, penalty relief for subsequent periods will be based on reasonable cause and the absence of willful neglect.
A 2012 report by the Treasury Inspector General for Tax Administration (TIGTA) found that most taxpayers with compliant tax histories are not offered and do not receive an FTA waiver. For the 2010 tax year, approximately 250,000 taxpayers with failure to file penalties and 1.2 million taxpayers with failure to pay penalties did not receive penalty relief even though they qualified for the FTA waiver. TIGTA also noted that the RCA “does not always provide employees with the appropriate penalty abatement determination. In these cases, IRS employees are instructed to override the [RCA] and follow Internal Revenue Manual policies and procedures.” However, in most of the sampled cases, the inaccurate determination was not corrected by the IRS employee.
It is important to retain professional representation to ensure the IRS applies the proper abatement.