Fight The IRS With First-Time Abatement

The American tax system is complicated, and the idea of paying penalties can be especially scary if you, like most, aren't super familiar with how it all works. If you have to pay a tax penalty for not filing on time or failing to pay, there may be something you can do to lessen that burden. It's called first-time abatement, and if you qualify, it can actually reduce the penalties you owe.

Here's what you need to know about it.

What is first-time abatement?

First-time abatement is administrative relief provided by the IRS that's available to those who are in good tax standing. That means you can't have had any penalties for the previous three years' of tax returns, and you have to have filed the same tax return type for those years. (Hence the phrase "first-time.")

You also can't have four or more Failure to Deposit penalty waiver codes in the past three years, and any Failure to Deposit penalties can't have been charged for Electronic Federal Tax Payment System (EFTPS) avoidance, per the IRS.

For those who qualify, it can remove any failure to file and failure to pay penalties that would otherwise apply. So for example, if you owe $10,000 on last years' taxes, you would be subject to a 0.5% failure penalty, or $50 per month. First-time abatement would either wipe that out or at the very least, reduce it.

How to file for first-time abatement

You should receive a letter or notice about your tax situation from the IRS if you owe tax penalties, and if so, there will be a toll-free number listed that you can call to request first-time abatement. While some requests can be accepted over the phone, keep in mind that you may have to send a written statement or Form 843, Claim for Refund and Request for Abatement.

You can also appeal a first-time abatement rejection if you feel that you should have been granted that. But once you're approved, the IRS would then either reduce or remove the related penalties and subsequent interest.

How to shore up your tax situation this year

If your tax situation has proven difficult to predict, leading to issues like failure to pay, it's a good idea to start using tax software to help you file your tax return correctly and on time. Plus, depending on the program you choose, it may provide access to educational materials that can help you better understand your tax situation and plan accordingly. Or, if you prefer a more personal option, a qualified tax professional can help. Once you find a potential tax preparer, be sure to check their credentials using the IRS's directory of federal tax return preparers to make sure they're up to the task.

You may also want to consider starting to pay your taxes quarterly (this is generally required if you're self employed or operate a freelance business.) You may even want to start paying monthly, since that may be easier to keep up with and track. Either way, you can use IRS Direct Pay to get it done. That way, you'll be ahead of any potential tax bill, or at least reduce it.

The IRS doesn't exactly make it easy for some individuals to avoid penalties, offering complex rules that can be difficult to follow if you don't fall into the W-2 only camp. Still, if you take the time to understand your options, you'll be much better prepared for next year's taxes, and you'll be able to avoid those pesky penalties.