Updated July 14, 2020:

What Is the S Corp Late Filing Penalty Abatement?

The S Corp Late Filing Penalty Abatement is a waiver that a company can apply for to ask the IRS to reduce or eliminate assessed penalties. These costly penalties are charged to companies who don't file, don't pay, or don't deposit money due to the IRS in a timely manner. This process is not used for relief of penalties associated with the accuracy of returns. Acknowledging that everyone makes mistakes, the IRS offers this as a reward for companies who are normally compliant with the deadlines. 

What Is the Purpose of Late Filing Penalties?

Taxes and penalties can be infuriating. They must be paid according to strict deadlines and sometimes they seem arbitrary and unfair. But the IRS emphasizes that the purpose of penalties is to encourage compliance, not generate more money.

How Does Penalty Abatement Work?

The IRS set up the first-time penalty abatement administrative waiver (FTA) more than 10 years ago. This process allows companies with a history of compliance to ask the IRS to reduce or remove penalties. It's only available the first time a company makes such an error. Often that amounts to many dollars saved for the company.

Even though the FTA has been available for several years, very few taxpayers take advantage of it. In 2012, a report from the Treasury Inspector General for Tax Administration (TIGTA) stated that most companies just don't know it exists. The report also points out that the IRS has an automated tool for penalty determinations and it often incorrectly denies FTAs.

Benefits of the FTA Process

  • The FTA is easy for the IRS to process.
  • The FTA cites specific language from the Internal Revenue Manual to support the decision.
  • The FTA process lets tax professionals work efficiently and maximize their time.

How to Apply for an FTA

Taxpayers can apply for an FTA in multiple ways in certain circumstances.

  • The first way is to apply before the penalty is ever assessed. The taxpayer files a penalty non-assertion request along with their official return asking the Internal Revenue Service not to levy a penalty.
  • The second method is later in the process when the IRS has already levied the penalty. The company writes a penalty abatement letter. The taxpayer can also call the IRS or reach them via e-services.
  • The last method takes place after the penalty has already been paid. Form 843, Claim for Refund and Request for Abatement, lets the taxpayer ask for a refund. It must be filed within 36 months of when the return was due or within 24 months of the penalty payment.

Categories of Relief

Four categories of abatement from penalties are available.

  • Reasonable cause
  • Statutory exceptions
  • Correction of IRS error
  • Administrative waivers: This involves the IRS formally stating or clarifying a provision that gives abatement from a penalty. The statement can take the form of a policy publication, press release, or another form of official communication. The FTA is the most common form of an administrative waiver.

Who Qualifies for Penalty Abatement?

To get an FTA waiver, a taxpayer must:

  • Have filed all the required returns or at least have filed a valid extension.
  • Not have an open request for a return from the IRS.
  • Have paid or entered an installment plan to pay all taxes due. If a payment plan is in place, the installments must be current.
  • Have no prior penalties in the last three years except for an estimated tax penalty. Receiving reasonable cause relief in the past does not disqualify the business from receiving an FTA.

What Kind of Penalties Can Be Abated?

The FTA can only apply to some types of penalties and returns. Sometimes determining eligibility is the hardest part of the process.

  • Individuals can ask for an FTA for failure to file or failure to pay penalties. Estate and gift tax returns are ineligible.
  • Business taxpayers, including those who remit payroll taxes, can apply for an FTA for failure to file, failure to pay, and failure to deposit penalties. Though it is not spelled out specifically in the Internal Revenue Manual, the IRS practice has been to allow FTAs for S corps and partnerships.

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