AUGUST 19, 2023

What Is IRS One-Time Forgiveness?

Despite what you may have heard on the radio, IRS one-time forgiveness is not a forgiveness of your tax debt.

There are programs at the IRS that can result in your tax debt being “forgiven” (as in written off). One example of such a program is the IRS offer in compromise program.

But IRS one-time forgiveness is a forgiveness of certain penalties and interest on those penalties — not a forgiveness of the underlying tax debt itself.

What Is IRS One-Time Forgiveness?

IRS one-time forgiveness, also known as first-time abatement, is a special IRS waiver of a taxpayer’s failure-to-file, failure-to-pay, or failure-to-deposit penalties for a given year due to the taxpayer’s past compliance.

In 2001, the IRS introduced the concept of one-time forgiveness for penalties. Despite being in existence for over two decades and proving its usefulness, many taxpayers are still unaware of this option.

Contrary to its name, taxpayers can actually utilize the IRS one-time forgiveness multiple times — and I will elaborate on this later. But first, let’s go over the basic details of IRS one-time forgiveness.

What Penalties Does IRS One-Time Forgiveness Apply To?

Although the IRS enforces over 100 different types of penalties, the one-time forgiveness option is only applicable to these three:

  1. Failure-to-File Penalty: This penalty is imposed when you file your tax return after the due date. The penalty is 5% of the unpaid tax amount per month, capping at 25% of the total tax owed.
  2. Failure-to-Pay Penalty: This penalty arises if you pay your taxes late after the April 15 deadline. It’s 0.5% of the unpaid tax amount per month, maxing out at 25% of the total tax owed. If both the failure-to-file and failure-to-pay penalties apply, the failure-to-pay penalty reduces the failure-to-file penalty, ensuring that you don’t accrue more than 5% in penalties monthly. Combined, these penalties peak at 47.5% of the tax owed after approximately four years.
  3. Failure-to-Deposit Penalty: This penalty is assessed on employers who fail to deposit employment taxes accurately and punctually. Employees have several deductions from their paychecks, including federal income taxes, Social Security taxes, Medicare taxes, and Federal Unemployment Tax. Employers are responsible for remitting these payments to the Treasury. If they don’t or if they’re late, the IRS imposes a penalty ranging from 2% to 15% of the unpaid deposit.

The one-time forgiveness applies collectively to these three penalties for a given tax year, rather than being penalty-specific.

It’s important to note that while the IRS’ Internal Revenue Manual generally addresses individual taxpayers’ eligibility for one-time forgiveness regarding the failure-to-file and failure-to-pay penalties, I’ve also successfully secured abatements for failure-to-file penalties of partnerships and S corporations.

However, it’s explicit in the IRS Manual that one-time forgiveness cannot be obtained for penalties related to estate tax returns, gift tax returns, or returns attached to other returns (e.g., Form 5471 or Form 5472). These penalties can only be abated with a reasonable cause.

How to Qualify For IRS One-Time Forgiveness

To be eligible for IRS one-time forgiveness, you must meet these criteria:

  1. Filing Compliance According to IRS Policy Statement 5-133: You must have filed all required tax returns for the current period. This generally means filing at least the last six years’ returns if you had a filing requirement. If it’s between April 15 and October 15 and you’ve extended your previous year’s return, that’s acceptable. IRS-generated substitutes for returns are not counted.
  2. Filing Compliance for the Three Years Preceding the Relevant Tax Year: You must have filed all required tax returns for the three years before the tax year you’re seeking forgiveness for.
  3. Payment Compliance: You must have paid or arranged payment for all current taxes due. If you’re on a short-term payment plan or installment agreement with the IRS and are current on payments, you satisfy this criterion.
  4. Clean Penalty History: You should not have any unreversed IRS penalties (except estimated tax penalties) for the three years preceding the tax year you’re seeking forgiveness for. Additionally, you cannot have had penalties reversed due to one-time forgiveness or tolerance.

Based on the second and fourth criteria above, a taxpayer can qualify for one-time forgiveness every three tax years.

How to Get IRS One-Time Forgiveness

When requesting IRS one-time forgiveness, you have two options:

  1. Request via Phone: Call the toll-free number on your penalty notice and make your request.
  2. Request via Letter: Send a letter to the address indicated on your penalty notice, explaining why you qualify for one-time forgiveness for a specific tax year.

I personally recommend the phone option because it’s more straightforward and allows for multiple attempts if the first IRS representative denies your request.

In case your penalty is substantial, the IRS representative might advise you to submit a written request for one-time forgiveness.

In such instances — or if you prefer written communication — compose a letter to the IRS detailing your eligibility for one-time forgiveness for a particular tax year. Send this letter to the address on your penalty notice.

If You Are Approved for IRS One-Time Forgiveness

If the IRS approves your request for one-time forgiveness over the phone, they’ll inform you during the call.

Whenever the IRS grants one-time forgiveness, they will send you Letter 3503C, stating:

“We are pleased to inform you that your request to remove the failure to file and failure to pay penalties has been granted. However, this action has been taken based solely on the fact that you have a good history of timely filing and timely paying.”

This letter clarifies that if you still owe taxes for the relevant tax year, the failure-to-pay penalty will continue until the tax is fully paid. After full payment, you can request abatement of the additional failure-to-pay penalty.

The IRS Manual confirms that this subsequent abatement of the ongoing failure-to-pay penalty can also be covered under one-time forgiveness.

If You Are Denied IRS One-Time Forgiveness

Should your request for one-time forgiveness be denied, the IRS will send you a rejection letter with information about appealing their decision to the IRS Office of Appeals.

If you miss the appeals deadline or if the IRS Office of Appeals rejects your abatement request as well, your only recourse is to pay the penalty and pursue a refund by suing the government. This can be done in either the District Court or the Court of Federal Claims.

Letter 1277 from Appeals will guide you through the process of filing such a suit:

  1. Pay the penalty.
  2. Submit a refund claim for the penalty using Form 843 to the IRS Service Center that processed the relevant tax return. Include a statement requesting prompt disallowance of your claim.
  3. Await formal notice of claim disallowance by mail.
  4. File your suit in the District Court or the Court of Federal Claims within two years from the date of the disallowance notice.

Dealing with the IRS Office of Appeals and appealing penalty rejections is a complex topic that warrants a separate article. I will address this in a forthcoming article.