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28.4 Penalty Abatement (FTA & Reasonable Cause)

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Enrolled Agent EA

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1 Part 1, Chapter 1: Tax Return Basics & Filing Requirements

1.1 Form 1040 Overview & Structure 1.2 Form 1040-SR for Seniors 1.3 Who Must File (Income Thresholds) 1.4 Filing Deadlines & Extensions (Form 4868) 1.5 Penalties: Failure to File vs. Failure to Pay 1.6 Sources of Tax Information (W-2s, 1099s, K-1s) 1.7 Preparer Due Diligence Requirements 1.8 Amended Returns (Form 1040-X)

2 Part 1, Chapter 2: Filing Status & Dependents

2.1 Single & Married Filing Jointly 2.2 Married Filing Separately 2.3 Head of Household Requirements 2.4 Qualifying Surviving Spouse 2.5 Qualifying Child Test (5 Tests) 2.6 Qualifying Relative Test (4 Tests) 2.7 SSN, ITIN & Residency Status

3 Part 1, Chapter 3: Wages & Employee Compensation

3.1 W-2 Income & Withholding 3.2 Employee vs. Independent Contractor 3.3 1099-NEC, 1099-MISC & 1099-K Reporting 3.4 Fringe Benefits (Taxable vs. Non-Taxable) 3.5 Stock Options (ISO vs. NQSO) 3.6 Special Categories (Clergy, Military, Foreign)

4 Part 1, Chapter 4: Interest, Dividends & Other Income

4.1 Taxable vs. Tax-Exempt Interest 4.2 US Savings Bonds & OID 4.3 Ordinary vs. Qualified Dividends 4.4 Schedule B Requirements 4.5 Rental & Royalty Income Basics 4.6 Alimony, Gambling & Other Income 4.7 Cancelled Debt & Form 1099-C 4.8 Net Operating Loss (NOL)

5 Part 1, Chapter 5: Capital Gains & Property Transactions

5.1 Capital vs. Non-Capital Assets 5.2 Cost Basis Calculation 5.3 Inherited & Gifted Property Basis 5.4 Short-Term vs. Long-Term Gains 5.5 Capital Gains Tax Rates (0%, 15%, 20%) 5.6 Netting & the $3,000 Loss Limit 5.7 Wash Sales & Related Party Rules 5.8 Sale of Primary Residence (Section 121) 5.9 Installment Sales (Form 6252) 5.10 Like-Kind Exchanges (Section 1031)

6 Part 1, Chapter 6: Adjustments to Income

6.1 Educator Expenses & HSA Contributions 6.2 Self-Employment Tax Deduction 6.3 IRA Contributions (Traditional) 6.4 Student Loan Interest Deduction 6.5 Alimony Paid (Pre-2019 Divorces) 6.6 Other Adjustments & New OBBBA Deductions (Tips, Overtime, Auto Loan, Senior Bonus)

7 Part 1, Chapter 7: Deductions (Standard & Itemized)

7.1 Standard Deduction by Filing Status 7.2 Medical & Dental Expenses (7.5% Floor) 7.3 State & Local Taxes (SALT $40K Cap) 7.4 Mortgage Interest Deduction 7.5 Charitable Contributions 7.6 Casualty & Theft Losses 7.7 QBI Deduction (Section 199A)

8 Part 1, Chapter 8: Tax Calculation & Credits

8.1 Tax Tables & Rate Schedules 8.2 Alternative Minimum Tax (AMT) 8.3 Self-Employment Tax Calculation 8.4 Child Tax Credit & Additional CTC 8.5 Earned Income Tax Credit (EITC) 8.6 Education Credits (AOC & LLC) 8.7 Child & Dependent Care Credit 8.8 Other Credits (Saver's, Premium Tax)

9 Part 1, Chapter 9: Retirement Accounts & Social Security

9.1 Traditional vs. Roth IRA 9.2 401(k), 403(b) & TSP Basics 9.3 SEP-IRA & SIMPLE IRA 9.4 Required Minimum Distributions (RMDs) 9.5 Early Withdrawal Penalties & Exceptions 9.6 Social Security Taxation

10 Part 1, Chapter 10: Specialized Individual Returns

10.1 Estate Tax (Form 706) 10.2 Gift Tax (Form 709) 10.3 Foreign Income (Form 2555) 10.4 FBAR & FATCA Reporting 10.5 Farm Income (Schedule F) 10.6 Disaster Area Rules

11 Part 2, Chapter 11: Business Entity Types

11.1 Overview of Entity Types 11.2 State Law vs. Tax Classification 11.3 Entity Selection: Reasonable Comp & QBI 11.4 Form 8832 & Rev. Proc. 2009-41 11.5 LLC Deep Dive: Spouses & EINs 11.6 Changing Status: The 60-Month Rule

12 Part 2, Chapter 12: Starting a Business

12.1 Hobby vs. Business (Profit Motive) 12.2 Employer Identification Number (EIN) 12.3 Tax Year Selection 12.4 Recordkeeping Requirements 12.5 Statute of Limitations 12.6 Related Party Transactions 12.7 Start-Up Costs, Entity Choice & OBBBA Business Changes (2025)

13 Part 2, Chapter 13: Worker Classification & Payroll

13.1 Employee vs. Independent Contractor 13.2 Common Law Test (Behavioral, Financial, Relationship) 13.3 Statutory Employees & Non-Employees 13.4 Form 941 & Payroll Deposits 13.5 Trust Fund Recovery Penalty 13.6 FUTA & Unemployment Taxes

14 Part 2, Chapter 14: Accounting Methods & Income

14.1 Cash vs. Accrual Method 14.2 Hybrid Methods & Changes 14.3 Inventory & COGS 14.4 Gross Receipts & Income Recognition 14.5 Constructive Receipt 14.6 Form 1099 Reporting Requirements 14.7 §163(j) Business Interest Expense Limitation 14.8 §174 Research & Experimental Expenditures

15 Part 2, Chapter 15: Depreciation & Asset Treatment

15.1 MACRS Basics & Recovery Periods 15.2 Mid-Month, Mid-Quarter, Half-Year Conventions 15.3 Section 179 Expense Deduction 15.4 Bonus Depreciation 15.5 Listed Property Rules 15.6 Amortization of Intangibles 15.7 Depletion 15.8 Disposition of Business Assets

16 Part 2, Chapter 16: Business Deductions

16.1 Ordinary & Necessary Test 16.2 Business Travel Expenses 16.3 Business Meals (50% Limitation) 16.4 Business Use of Vehicle 16.5 Home Office Deduction 16.6 Business Interest Limitation (163(j)) 16.7 Business Bad Debts

17 Part 2, Chapter 17: Business Credits & Fringe Benefits

17.1 General Business Credit Overview 17.2 R&D Credit & Disabled Access Credit 17.3 Small Employer Health Insurance Credit 17.4 Fringe Benefit Rules 17.5 Cafeteria Plans (Section 125) 17.6 Achievement Awards & Other Benefits

18 Part 2, Chapter 18: Sole Proprietorships

18.1 Schedule C Overview 18.2 Calculating Net Profit/Loss 18.3 Self-Employment Tax (Schedule SE) 18.4 Estimated Tax Payments 18.5 Hobby Loss Rules

19 Part 2, Chapter 19: Partnerships

19.1 Partnership Formation 19.2 Partner's Basis Calculation 19.3 Form 1065 Overview 19.4 Schedule K-1 (Partner's Share) 19.5 Guaranteed Payments 19.6 Partnership Distributions 19.7 At-Risk & Passive Activity Rules 19.8 Partnership Termination & Liquidation

20 Part 2, Chapter 20: C Corporations

20.1 Form 1120 Overview 20.2 Corporate Tax Rate (21%) & CAMT 20.3 Accumulated Earnings Tax 20.4 Dividends Received Deduction 20.5 Earnings & Profits (E&P) 20.6 Corporate Distributions, Dividends & Stock Redemptions 20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions 20.8 Corporate Liquidation

21 Part 2, Chapter 21: S Corporations

21.1 S Election Requirements (Form 2553) 21.2 Form 1120-S Overview 21.3 Shareholder Basis Calculation 21.4 Reasonable Compensation 21.5 S Corporation Distributions 21.6 Built-In Gains Tax & Termination

22 Part 2, Chapter 22: Specialized Business Returns

22.1 Trusts & Estates (Form 1041) 22.2 Simple vs. Complex Trusts 22.3 Distributable Net Income (DNI) 22.4 Tax-Exempt Organizations (Form 990) 22.5 Retirement Plans (Form 5500) 22.6 Qualified Retirement Plans Overview 22.7 Farm Taxation 22.8 Rental Real Estate Activities

23 Part 3, Chapter 23: Practice Before the IRS

23.1 What is Practice Before the IRS? 23.2 Who Can Practice (Full Rights) 23.3 Limited Practice Rights (AFSP, Unenrolled) 23.4 Special Relationships (Family, Employees) 23.5 PTIN Requirements 23.6 Circular 230 Overview 23.7 Office of Professional Responsibility (OPR)

24 Part 3, Chapter 24: Becoming & Maintaining EA Status

24.1 Two Paths to EA (Exam vs. IRS Experience) 24.2 Application Process (Form 23) 24.3 Background & Compliance Checks 24.4 Renewal Requirements (Form 8554) 24.5 Continuing Education Requirements 24.6 Inactive Status & Termination

25 Part 3, Chapter 25: Practitioner Duties (Circular 230)

25.1 Due Diligence Requirements 25.2 Knowledge of Client's Omission 25.3 Conflict of Interest Rules 25.4 Fee Requirements (Contingent, Unconscionable) 25.5 Advertising & Solicitation Rules 25.6 Tax Return Position Standards 25.7 Written Advice Standards 25.8 Sanctions & Penalties for Violations

26 Part 3, Chapter 26: Power of Attorney & Authorization

26.1 Form 2848 (Power of Attorney) 26.2 CAF (Centralized Authorization File) 26.3 Form 8821 (Tax Information Authorization) 26.4 Third-Party Designee 26.5 Signing Returns for Taxpayers 26.6 Client Confidentiality & Privilege 26.7 Representing Clients in Audits (Examination) 26.8 Appealing IRS Decisions 26.9 Collection Representation

27 Part 3, Chapter 27: Legal Authority & Research

27.1 Hierarchy of Tax Authority 27.2 Internal Revenue Code 27.3 Treasury Regulations 27.4 Revenue Rulings & Procedures 27.5 Court Cases & Precedent 27.6 Statutes of Limitations

28 Part 3, Chapter 28: Specific Representation Issues

28.1 Trust Fund Recovery Penalty (TFRP) 28.2 Innocent Spouse Relief (Form 8857) 28.3 Injured Spouse Allocation (Form 8379) 28.4 Penalty Abatement (FTA & Reasonable Cause) 28.5 Taxpayer Advocate Service (TAS) 28.6 Freedom of Information Act (FOIA)

29 Part 3, Chapter 29: Final Review & Exam Strategy

29.1 Exam Structure & Logistics (2026-2027) 29.2 The "Clock" of Representation (Master Deadlines) 29.3 Ethics vs. Law (Sanctions & Penalties) 29.4 Final Mock Review & Exam Strategy

30 Part 3, Chapter 30: Filing Process & E-File

30.1 E-File Requirements (The "More Than 10 Returns" Rule) 30.2 ERO Responsibilities 30.3 EFIN & Application Process 30.4 Form 8879 (Signature Authorization) 30.5 Record Retention & Data Security (WISP) 30.6 Preparer Penalties (Filing Specific)

28.4 Penalty Abatement (FTA & Reasonable Cause)

Key Takeaways Explain This Topic AI

First Time Abatement (FTA) waives failure to file, failure to pay, and failure to deposit penalties.

FTA criteria: Clean compliance history for the prior 3 years.

For Tax Year 2025: IRS systems often apply FTA automatically when eligible (manual request still possible).

Reasonable Cause: Based on "ordinary business care and prudence" (e.g., fire, death, serious illness).

"Forgetfulness" or lack of funds is NOT reasonable cause for failure to file.

Request by phone (Practitioner Priority Service) or letter; Form 843 if penalty already paid.

Last updated: October 2026

  • Penalty Abatement: Getting Penalties Removed
  • Why This Matters for the Exam

Penalty abatement is a practical skill that every EA needs. The exam tests your knowledge of when abatement is available, what qualifies as reasonable cause, and the First Time Abatement (FTA) administrative waiver.

Understanding IRS Penalties

Before discussing abatement, it's important to understand the common penalties:

Penalty Rate Applies When

Failure to File (FTF) 5% per month (max 25%); minimum $525 for returns required to be filed in 2026 if >60 days late Return not filed by due date

  • Failure to Pay (FTP) 0.5% per month (max 25%) Tax not paid by due date
  • Failure to Deposit (FTD) 2-15% Payroll taxes not deposited on time
  • Accuracy-Related 20% of underpayment Negligence, substantial understatement
  • Fraud 75% of underpayment Intentional disregard of rules

Note: FTF and FTP run concurrently. If both apply, FTF is reduced by FTP. Combined max for FTF+FTP over 5 months = 25% + 22.5% = 47.5%.

Method 1: First Time Abatement (FTA)

FTA is an administrative waiver that removes FTF, FTP, and FTD penalties for taxpayers with a clean compliance history. It's not in the Internal Revenue Code—it's an internal IRS policy (IRM 20.1.1.3.6.1).

FTA Eligibility Requirements

  • Requirement Details
  • Clean History No penalties (or all penalties abated) for the prior 3 tax years
  • Filings Current All required returns filed (or on valid extension)
  • Payments Current Any tax due has been paid or is in a payment arrangement

"Prior 3 Tax Years" Example: To get FTA for Tax Year 2025, the taxpayer must be penalty-free for Tax Years 2022, 2023, and 2024.

  • Penalties Covered by FTA
  • ✅ Failure to File (FTF)
  • ✅ Failure to Pay (FTP)
  • ✅ Failure to Deposit (FTD)
  • ❌ Accuracy-Related Penalties (not covered)
  • ❌ Fraud Penalties (not covered)
  • How to Request FTA

By Phone: Call 800-829-1040 and ask for FTA. The IRS representative can apply it immediately if eligible.

By Letter: Write to the IRS service center with a request citing "First Time Abatement Relief."

Automated Application: For Tax Year 2025, the IRS continues to automatically apply FTA for many eligible taxpayers. Practitioners should still verify and request manually if not applied.

Practitioner Tip: Always check if FTA applies before arguing reasonable cause. FTA is easier to get and doesn't require documentation.

Method 2: Reasonable Cause

If FTA doesn't apply (or the penalty isn't covered), the taxpayer can request abatement based on reasonable cause .

The Standard: "Ordinary Business Care and Prudence"

The taxpayer must show they exercised ordinary business care and prudence but were still unable to comply with the tax obligation.

Factors the IRS Considers:

What circumstances caused the failure?

Could the taxpayer have anticipated the problem?

Did the taxpayer take steps to comply once the problem was resolved?

Has the taxpayer had similar problems in the past?

Examples of Valid Reasonable Cause

  • Circumstance Why It Qualifies
  • Death of taxpayer or immediate family Emotional and logistical disruption
  • Serious illness or incapacity Physical inability to comply
  • Fire, flood, or natural disaster Records destroyed, focus on survival
  • Erroneous IRS advice (written) Relied on official IRS guidance
  • Postal service failure Documented proof of mailing
  • System outage on filing deadline IRS/e-file provider failure
  • Examples That Are NOT Reasonable Cause
  • Circumstance Why It Fails
  • Forgetfulness Not "ordinary business care"
  • Lack of funds Generally not sufficient (you still must file)
  • Didn't know the law Ignorance is not an excuse
  • Reliance on agent to FILE Filing is a non-delegable duty
  • Busy with other matters Tax is still a priority

Key Distinction: Lack of funds is generally NOT reasonable cause for failure to file , but it may mitigate failure to pay if the taxpayer filed on time and made good-faith efforts to pay.

Requesting Reasonable Cause Abatement

Documentation Required:

Explanation of what happened and why it prevented compliance.

Supporting evidence (medical records, fire reports, death certificates).

Timeline showing when the event occurred and when compliance became possible.

Evidence of steps taken to comply once the impediment was removed.

Where to Send:

Respond to the penalty notice by mail to the address shown.

Or use Form 843 (Claim for Refund and Request for Abatement) if the penalty has already been paid.

FTA vs. Reasonable Cause Comparison

  • Factor First Time Abatement Reasonable Cause
  • Legal Basis IRS administrative policy IRC §6651, §6656
  • Eligibility Clean 3-year history Specific circumstances
  • Documentation None required May need significant proof
  • Penalties Covered FTF, FTP, FTD only All civil penalties
  • Ease of Approval Easy (automatic/phone) Harder (case-by-case)
  • Real-World Scenario

Scenario: A taxpayer filed her 2025 return on October 20, 2026 (after the April 15 and extension deadlines). She had no extensions. The IRS assessed a Failure to File penalty (minimum $525 since the return was >60 days late).

Can she get FTA? Check if she had no penalties for 2022, 2023, and 2024. If clean, she can call the IRS and request FTA by phone.

Can she claim Reasonable Cause? Only if she has a valid explanation (e.g., hospitalized September-October 2026). "I forgot" won't work.

On the Exam

Question types to practice on penalty abatement:

  • FTA Eligibility: "How many prior years must be penalty-free for FTA?"
  • Reasonable Cause Examples: "Which of the following is reasonable cause?"
  • Documentation: "What must a taxpayer show to claim reasonable cause?"

The key is to remember: FTA = 3-year clean history, covers FTF/FTP/FTD. Reasonable Cause = Ordinary business care and prudence.