Did IRS First Time Abate help you — or cost you?
A restaurant client calls, relieved. The IRS has just removed a $2,000 payroll tax penalty for the first quarter of 2024. The owner was seriously ill that spring, the CPA sent in a reasonable-cause letter for the first and second quarters, and everyone now assumes the illness explanation worked. The $700 second-quarter penalty is next, they figure. The paperwork looks fine. First Time Abate is why that assumption is often wrong — and why a penalty that comes off the account is not the same as a dispute that has been decided.
I was a revenue officer before I was a CPA. More than once I watched a practitioner close a payroll tax file because the IRS had granted an abatement, only to find out months later that the agency never ruled on the reasonable-cause argument at all. The IRS had used FTA — a program that rests on prior compliance, not on the facts of what went wrong. The penalty disappeared, the client was happy, and the firm had unknowingly spent the client’s three-year safety net on a problem that might have come off some other way. In our practice, that is the single most common unforced error we see in penalty work.
What is First Time Abate and how does the IRS apply it? 📜
First Time Abate is an administrative program the IRS applies when a taxpayer has a clean three-year compliance history. It is applied before reasonable cause and does not require the IRS to decide the facts of what went wrong.
The rules are in IRM 20.1.1 at section 20.1.1.3.3.2.1. FTA covers failure to file, failure to pay, and failure to deposit penalties. Eligibility requires that the taxpayer has filed, or filed a valid extension for, all currently required returns and has no penalties (other than the Estimated Tax Penalty) assessed in the three prior tax years. The IRS Administrative Penalty Relief page summarizes the same program for taxpayers. FTA is applied automatically whenever the IRS considers penalty relief for a period that qualifies — even when the taxpayer wrote in asking for reasonable cause.
That ordering matters. Because FTA is applied first, the IRS never has to look at the reasonable cause facts for the period it covers. The letter comes back saying the penalty has been removed, and unless the letter identifies the basis for relief, the practitioner cannot tell which argument the IRS accepted. Internally, FTA carries penalty reason code 018 or 020. The language in Letter 168C or in the collection series Letters 4722, 4723, and 4724 must identify prior compliance as the basis when FTA is used. When the letter is vague, call and ask for the relief basis, the reason code, and the status of any pending reasonable-cause request for other periods.
Why can First Time Abate cost a business its safety net? ⚠️
Because FTA uses up the only automatic penalty removal the IRS offers, and it does so based on history rather than on the facts. If a real problem comes up in the next three years, that safety net is gone — even if the original penalty would have come off another way.
Here is how the trap usually plays out. A business made a payroll tax deposit on time. The IRS posted the payment to the wrong quarter, which generated a failure-to-deposit penalty that should never have existed. The business or its CPA wrote in. The IRS, instead of correcting the posting, applied FTA. The penalty disappeared, the account looked clean, and the business spent its FTA on the IRS’s own mistake — even though the Internal Revenue Manual tells IRS employees not to use FTA for IRS errors. The three-year lookback resets on the FTA grant, so a later problem — one that really was the business’s fault — now has to earn its way off on reasonable cause alone.
Not a one-time break for life
The name misleads. FTA eligibility returns once the three-year lookback is clean again. A business that uses FTA in 2024 can qualify again by 2028 if no penalties post in 2025 through 2027. Think of FTA as a renewable safety net, not a one-shot. That is why spending it on an IRS posting error — rather than fixing the posting — matters: you did not lose the safety net forever, but you lost it for three years, during which a real problem has no fallback.
Before closing a file where FTA was granted, confirm two things on the account transcript: that the IRS actually fixed any underlying posting error, and that the penalty was recalculated after the correction. Once a quarter has a manual penalty adjustment, the system stops recalculating it automatically. Someone at the IRS has to redo it by hand, and if nobody does, the account can show a zero balance while the underlying math still lives in the record. Make the IRS-error argument only when the records show the IRS — not the taxpayer or the payroll provider — misposted the payment.
How do you check the IRS’s math on a failure-to-deposit penalty? 🧮
Line the account transcript up against the deposit tiers in IRM 20.1.4.7.1 and the deposit schedule on Form 941. If the numbers do not reconcile, ask for the IRS’s computation and whether the penalty was averaged — the IRS cannot consider reasonable cause on an averaged penalty until a valid Schedule B is on file and the penalty has been recomputed.
The restaurant case is a clean illustration. The owner fell ill February 10 and got payment access back May 10, while payroll kept running. The restaurant was a monthly depositor with $10,000 in tax each month, paid electronically. Here is what the account transcript shows against the Form 941 instructions deposit schedule:
| Liability month | Due (2024) | Deposited | Days late | Penalty |
|---|---|---|---|---|
| April | May 15 | May 20 | 5 | $200 (2%) |
| May | June 17 | June 24 | 7 | $500 (5%) |
| June | July 15 | July 15 | 0 | $0 |
June 15, 2024 was a Saturday, so the May deposit was due Monday, June 17 — the business-day rule in IRM 20.1.4.7.3. The failure-to-deposit tiers in IRM 20.1.4.7.1 run 2% for 1 to 5 days late, 5% for 6 to 15 days, 10% for more than 15 days, and 15% once the deposit is 10 or more days past an IRS notice. Those two late deposits add to $700, which is the second-quarter penalty that is still open.
Before arguing reasonable cause, check two things. First, did the IRS average the penalty? When line 16 of Form 941 or the Schedule B that supports it is missing or wrong, the IRS may spread the liability evenly across the quarter. IRM 20.1.4.26 and 20.1.4.26.1 say the IRS cannot consider reasonable cause on an averaged penalty until a valid schedule has been filed and the penalty has been recomputed. If the numbers won’t reconcile, ask for the IRS’s computation before anything else. Second, if the IRS moved a misapplied payment into the right quarter, do not assume the penalty followed. The credit transfer rules in IRM 20.1.4.22(3) mean the penalty on the receiving quarter may need to be recomputed by hand. The automated system often will not do it.
What does reasonable cause actually require on each late payroll deposit? 📂
The ordinary business care and prudence test applied deposit by deposit. The IRS can grant relief on one and deny the other, so each late deposit needs its own documented explanation.
The IRS reasonable cause rules and IRM 20.1.1.3.2 lay out the standard: did the taxpayer exercise ordinary business care and prudence under the circumstances but was still unable to meet the obligation? Illness or absence is a recognized basis in IRM 20.1.1.3.2.2.1, but it has to be tied to the specific obligation that was missed. For a payroll deposit, that means the person who was ill was the only person who could initiate the deposit, during the window when the deposit was due.
I start by mapping how payroll kept running while the owner was sick. If wages went out while deposits waited on the owner’s approval, there is a tension to explain — the business clearly had the money and the operational capacity to do payroll, so why could nobody deposit the taxes withheld? If the bank records show a second signer, I find out whether that person had EFTPS access; signing checks is not deposit access. If someone else could have deposited and did not, the IRS will ask why.
Take the $200 penalty first. The owner got payment access back May 10, and the deposit was due May 15. A February hospitalization does not explain that five-day gap on its own. The records I would want: medical records for May 10 through 20, every bill the owner paid that week, and the EFTPS login history. If the owner paid a vendor on May 12 but not the IRS, that is a prioritization question the IRS will ask. The $500 penalty is harder. The owner says cash was tight, but IRM 20.1.1.3.2 is clear that lack of funds alone is not reasonable cause. If the records show the owner could have deposited on time and had the money, I would stop leaning on the illness for May and tell the client so.
From our practice: a $700 penalty is also a scope conversation
For a $700 penalty, I discuss scope with the client before doing more work. I look for the one missing fact that could change my advice and weigh the cost of getting it against the amount at stake. If no new fact is likely to help, the client deserves that honest answer before paying for more representation. The best service in a close reasonable-cause case is sometimes to tell the client the money has already been spent as well as it is going to be — and to document FTA correctly so it is not wasted next time.
What should every practitioner check before closing an FTA file? ✅
Confirm the basis for relief and the penalty reason code, not just the adjustment on the transcript; account for every quarter you asked about; rule out averaged penalties and moved payments before arguing reasonable cause; and tie each explanation to a specific late deposit and the records for those dates.
- Pull the account transcript and read it against the IRS letter. The transcript shows how much came off; the letter shows why. If the letter is a stock paragraph, call and ask for the relief basis and the penalty reason code (018 or 020 means FTA).
- Verify FTA eligibility yourself. Three prior tax years clean of assessable penalties (estimated tax penalty excepted) and all required returns filed. If the IRS granted FTA in error, say so and ask that it be reversed.
- Reconcile the penalty against the deposit tiers. IRM 20.1.4.7.1 is the authority. If the numbers do not match, request the IRS’s computation before raising reasonable cause.
- Correct any posting errors before arguing anything else. If the problem was a moved payment or a wrong quarter, fix the posting on Form 843 or by request. Do not spend FTA on an IRS mistake.
- Document reasonable cause deposit by deposit. One timeline, one set of facts, and the specific records for the days each deposit was due. Treat each deposit as a separate claim.
- Account for every quarter you raised. If you asked for relief on two quarters and only one was addressed, confirm the status of the second one in writing. A pending request is not a closed one.
- Explain the result to the client in writing. “The penalty came off, which is good. But the IRS may not have agreed with the reason we gave; it may have used your prior compliance history instead” — in plain English, so the client knows what the safety net now looks like.
Summary: how to handle First Time Abate without losing the safety net
- FTA is applied before reasonable cause and based on prior compliance (IRM 20.1.1.3.3.2.1); the IRS does not have to decide the underlying facts for the period it covers.
- Letter 168C or Letters 4722 through 4724 must identify prior compliance as the basis when FTA is used. Penalty reason code 018 or 020 confirms it on the transcript.
- FTA eligibility returns once the three-year lookback is clean again — it is renewable, not one-shot.
- Never let FTA remove a penalty caused by an IRS posting error. Correct the posting instead, so FTA stays available for a real problem later.
- Reasonable cause is applied deposit by deposit. Lack of funds alone is not enough; tie each late deposit to a specific documented obstacle under IRM 20.1.1.3.2.
Frequently asked questions about First Time Abate ❓
Q. What is First Time Abate (FTA) and when does the IRS apply it?
First Time Abate is an administrative penalty relief program the IRS applies automatically when a taxpayer has a clean compliance history for the three prior tax years and the penalty is for failure to file, failure to pay, or failure to deposit. The IRS applies it before considering reasonable cause and uses it even when the taxpayer requested relief on a different ground. See IRM 20.1.1.3.3.2.1.
Q. How do I tell whether a penalty was removed under FTA or under reasonable cause?
Read the IRS letter together with the account transcript. When FTA is granted, the IRS must say the relief was based on prior compliance; the language usually appears in Letter 168C or in collection Letters 4722 through 4724. The transcript code shows the adjustment amount, and the penalty reason code (018 or 020) identifies FTA. If the letter is vague, call the IRS and ask for the relief basis and the reason code.
Q. Does FTA cover payroll tax penalties and the failure to deposit penalty under IRC 6656?
Yes. FTA applies to failure to file (IRC 6651(a)(1)), failure to pay (IRC 6651(a)(2) and (a)(3)), and failure to deposit under IRC 6656 for payroll tax deposits. The deposit penalty tiers are set out in IRM 20.1.4.7.1: 2% for 1 to 5 days late, 5% for 6 to 15 days, 10% for more than 15 days, and 15% once the deposit is 10 or more days past an IRS notice.
Q. Is First Time Abate a one-time break for the life of the business?
No. Eligibility returns once the three-year lookback is clean again. A business that uses FTA in 2024 can qualify again by 2028 if no penalties post in 2025 through 2027 and all required returns were filed. The name is misleading; think of FTA as a renewable safety net rather than a one-shot.
Q. What should I do if the IRS used FTA to remove a penalty caused by an IRS posting error?
Ask the IRS to correct the account and reinstate FTA. The IRM tells IRS employees not to use FTA to cover the agency’s own posting errors. Pull the account transcript, document the misposted payment, and request that the penalty come off because the deposit was timely, not because of prior compliance. If FTA was already granted, ask that it be reversed and reapplied in the correct year.
Q. Can I argue reasonable cause after the IRS has already granted FTA?
Yes, for a different tax period. FTA covers only one period at a time, so if you requested relief for two quarters and the IRS granted FTA on one, the other quarter is still open for reasonable cause. Each late deposit must be explained on its own facts under the ordinary business care and prudence test in IRM 20.1.1.3.2.
Q. What records does the IRS want to see for a reasonable cause claim on a late payroll deposit?
Hospital and medical records with dates, bank statements showing available funds and what was paid, EFTPS or bank access logs showing who could initiate deposits, and a timeline tying each late deposit to a specific obstacle. Lack of funds alone is not reasonable cause. The IRS also looks at whether a second signer or payroll provider could have deposited while the primary signer was unavailable.
This article is general information, not tax or legal advice for your situation. Penalty cases turn on their records. If the IRS has removed a payroll tax penalty for your business, or you are preparing a reasonable-cause letter, contact SW Accounting & Consulting Corp for a review before you close the file.
