Does the IRS’ First Time Abatement Rule Apply to Tax-Exempt Organizations?
The Section 6652(c) Penalty.
Section 6033(a)(1) of the Internal Revenue Code (the “Code”) generally requires “every organization exempt from taxation under section 501(a) . . . [to] file an annual return.” For tax-exempt organizations, the annual return is IRS Form 990, Return of Organization Exempt From Income Tax, Form 990-EZ, Short Form Return of Organization Exempt from Federal Income Tax, or IRS Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations. If the organization fails to file a timely and accurate return with the IRS, the IRS is permitted to impose a civil penalty against the organization under Section 6652(c) of the Code.
The daily rate of the civil penalty in addition to the maximum penalty that can be imposed generally depends on the size of the tax-exempt organization. For returns required to be filed in 2020, smaller organizations can be assessed civil penalties of up to $20 per day not to exceed the lesser of $10,500 or 5% of the gross receipts of the organization. But, for larger organizations—i.e., those with gross receipts exceeding $1,067,000—the daily rate of the civil penalty can increase to $105 per day up to a maximum of $54,000.
The Section 6651(c) penalties are not subject to the deficiency procedures of the Code. Accordingly, the IRS can assess the penalty without providing the organization with a notice of deficiency and an opportunity to challenge the penalty pre-payment in the United States Tax Court. See SEIU v. Comm’r, 125 T.C. 63 (2005); see also Sec. 6212.
IRS First Time Abatement Rule.
For approximately 20 years, the IRS has provided an administrative waiver of certain penalties referred to as First Time Abatement (FTA). To qualify for FTA, the following requirements must be met: (1) the penalty must fall within the scope of FTA; (2) the taxpayer must have filed, or filed a valid extension for, all required returns currently due; and (3) the taxpayer must have paid, or arranged to pay, any taxes currently due. See IRM pt. 188.8.131.52.3.2.1 (10-19-20).
The last two requirements are fairly straightforward. However, many tax practitioners tend to forget about the first requirement, i.e., which penalties qualify for FTA. Under the IRM, only the following penalties fall within the scope of FTA:
- Late-filing penalties under Section 6651(a)(1), Section 6698(a)(1), and Section 6699(a)(1);
- Late-payment penalties under Section 6651(a)(2) and Section 6651(a)(3); and
- The failure-to-deposit penalties under Section 6656.
IRM pt. 184.108.40.206.3.2.1 (10-19-20).
Significantly, the Section 6652(c) late-filing penalty does not fall within the above-specified penalties that qualify for FTA. And to remove any doubt, the IRM further provides that FTA does not apply to penalties located in IRM pt. 20.1.8—or those that relate to tax-exempt organizations. See IRM pt. 220.127.116.11.3.2.1(7). Accordingly, tax professionals and taxpayers alike will not find much success in seeking a waiver or abatement of the Section 6652(c) penalty on FTA grounds.
Many tax-exempt organizations are run by volunteers who are not tax experts. Accordingly, it is commonplace for these tax-exempt organizations to miss a necessary filing deadline for the IRS Form 990 series returns. In these instances, the tax-exempt organizations should attempt to seek waiver or abatement of the penalty on other grounds. For example, similar to most penalties in the Code, the defense of reasonable cause applies to the Section 6652(c) penalty. See Treas. Reg. § 301.6652-1(f). Depending on the particular facts and circumstances, the tax-exempt organization may also have other penalty defenses that may be available to fight the IRS on the penalty.