Penalty Exemption Program
Under current IRS rules, penalty relief is frequently granted for failure to file, failure to pay and failure to deposit--assuming the taxpayer is a first-time offender with a solid history of tax compliance. The IRS has now announced an automatic exemption from penalty (AEP) process that will replace the existing first-time abatement (FTA) process. The IRS recognized that the FTA process is not written into the law--instead, it exists because it is included in the internal revenue manual, or IRM, which provides guidelines for IRS' employees to follow. Taxpayers were required to request the FTA after receiving notice of the penalty. Under the AEP, taxpayers qualify if they have a history of filing and paying on a timely basis for the prior three years or 12 quarters, when quarterly returns are involved. For qualifying taxpayers, no penalties will be assessed for failure to file, failure to pay or failure to deposit (taxpayers must continue to pay any related tax and interest). The IRS will provide the taxpayer with a notice confirming that the relief has been granted.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about the IRS' newly announced automatic exemption from penalty program.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Bloink: The new AEP program reflects the reality that certain types of errors are common and made without any malice or intent to evade taxation. The IRS is simply recognizing that penalty relief for failure to file, failure to pay and failure to deposit is routinely granted. It makes complete sense that the IRS would be taking steps to modernize operations.
Byrnes: Yes, first-time penalty relief is routinely granted because when otherwise-compliant taxpayers make a mistake, we want to recognize the complexities of the tax system and provide an avenue to obtain penalty relief. Still, we have to recognize that when a taxpayer makes an error, penalties will be assessed. A system already exists to provide relief when those penalties are truly unwarranted or unfair.
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Bloink: As long as a taxpayer has a strong history of compliance with the tax law, there's no reason they should be penalized for inadvertent errors. The new program allows historically-compliant taxpayers to obtain penalty relief without the need to jump through unnecessary hoops. The new program also streamlines the administrative process for the IRS itself--and is intended to significantly reduce costs on the IRS' side.
Byrnes: When penalties are assessed, the noncompliant taxpayer should then be required to comply with the existing process for requesting relief--and someone on the IRS' end should be reviewing these requests to ensure the penalty relief is truly warranted. What the IRS is doing is essentially giving every single taxpayer a free pass with this AEP.
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Bloink: Taxpayers often miss out on first-time penalty relief entirely because they don't understand that they can request relief--or simply don't know how to request the relief. With the AEP, the first-time penalties are simply not assessed in the first place. We aren't granting across-the-board relief. Taxpayers must have a compliance history that spans for the three prior tax years in order to qualify for this relief.
Byrnes: A system such as this new AEP is bound to be subject to manipulation. This program simply does not assess penalties that exist for a good reason--at a time when the federal government should be focused on its expansive revenue needs.