Does the IRS’ First Time Abatement Rule Apply to Tax-Exempt Organizations?

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Matthew L. Roberts

Matthew L. Roberts

Principal

469.998.8482
mroberts@freemanlaw.com

Mr. Roberts is a Principal of the firm. He devotes a substantial portion of his legal practice to helping his clients successfully navigate and resolve their federal tax disputes, either administratively, or, if necessary, through litigation. As a trusted advisor he has provided legal advice and counsel to hundreds of clients, including individuals and entrepreneurs, non-profits, trusts and estates, partnerships, and corporations.

Having served nearly three years as an attorney-advisor to the Chief Judge of the United States Tax Court in Washington, D.C., Mr. Roberts leverages his unique insight into government processes to offer his clients creative, innovative, and cost-effective solutions to their tax problems. In private practice, he has successfully represented clients in all phases of a federal tax dispute, including IRS audits, appeals, litigation, and collection matters. He also has significant experience representing clients in employment tax audits, voluntary disclosures, FBAR penalties and litigation, trust fund penalties, penalty abatement and waiver requests, and criminal tax matters.

Often times, Mr. Roberts has been engaged to utilize his extensive knowledge of tax controversy matters to assist clients in their transactional matters. For example, he has provided tax advice to businesses on complex tax matters related to domestic and international transactions, formations, acquisitions, dispositions, mergers, spin-offs, liquidations, and partnership divisions.

In addition to federal tax disputes, Mr. Roberts has represented clients in matters relating to white-collar crimes, estate and probate disputes, fiduciary disputes, complex contractual and settlement disputes, business disparagement and defamation claims, and other complex civil litigation matters.

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. 20.1.1.3.3.2.1 (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:

IRM pt. 20.1.1.3.3.2.1 (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. 20.1.1.3.3.2.1(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.

Conclusion

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.