AICPA Urges IRS to Expand First Time Abatement Program

The American Institute of CPAs has submitted a formal recommendation to the IRS urging significant expansion of the First Time Abatement program to cover penalty categories that currently have no administrative relief pathway. The proposal targets information return penalties, estimated tax underpayments, and international filing failures — areas where small businesses and individual taxpayers face outsized financial consequences for first-time compliance errors.

The initiative addresses a fundamental fairness gap in tax administration: businesses navigating increasingly complex reporting requirements face severe penalties for initial mistakes, even when they demonstrate immediate corrective action and maintain otherwise clean compliance histories.

Current FTA Limitations

The existing First Time Abatement program, codified in IRM 20.1.1.3.6.1, provides relief only for three penalty categories:

• Failure to file (Section 6651(a)(1))
• Failure to pay (Section 6651(a)(2))
• Failure to deposit (Section 6656)

To qualify, taxpayers must demonstrate a clean penalty record for the three preceding tax years, all required returns must be filed (or on valid extension), and any tax due must be paid or on an approved payment plan.

While valuable, this narrow scope leaves taxpayers exposed to dozens of penalty provisions that impose significant financial harm for first-time violations — particularly in the information reporting and international compliance spheres where rule complexity has exploded.

The AICPA's Expansion Proposals

The AICPA's letter outlines five specific categories for FTA inclusion:

1. Information Return Penalties (Sections 6721/6722)

Penalties for incorrect or late Forms 1099, W-2, and other information returns currently start at $60 per form and escalate to $310 per form for intentional disregard. A mid-size business issuing 500 Forms 1099 that makes a systematic formatting error faces potential penalties of $155,000 — with no FTA relief available.

The AICPA argues that the penalty structure was designed for willful non-compliance but disproportionately punishes businesses making good-faith first attempts at complex reporting. The proliferation of information reporting requirements (1099-K threshold changes, 1099-DA for digital assets, expanded 1099-NEC usage) makes first-time errors increasingly likely.

2. Estimated Tax Penalties (Section 6654/6655)

Businesses and individuals who underestimate quarterly payments face automatic penalties calculated daily from the underpayment date. No reasonable cause exception exists for the individual penalty, and the corporate penalty's "annualized income" exception is computationally complex.

The AICPA proposes FTA eligibility for first-time underpayments below 10% of total tax liability — addressing situations where taxpayers make good-faith estimates that fall slightly short due to unexpected income or tax law changes.

3. International Information Return Penalties

This category represents the AICPA's most urgent request. Penalties for late or incomplete international forms are staggering:

• Form 5471 (foreign corporations): $10,000 per form, per year
• Form 5472 (foreign-owned U.S. corporations): $25,000 per form
• FBAR (FinCEN 114): Up to $16,117 per account for non-willful violations
• Form 8865 (foreign partnerships): $10,000 per form

A U.S. business owner who forms a single foreign subsidiary and fails to file Form 5471 for three years faces $30,000 in penalties — often exceeding the entity's total income. First-time international filers frequently miss these obscure requirements despite engaging professional preparers, because the forms aren't part of standard domestic tax preparation workflows.

4. Accuracy-Related Penalties (Section 6662)

The 20% accuracy penalty for substantial understatements currently has a reasonable cause defense but no administrative FTA pathway. The AICPA proposes that first-time accuracy penalties below $5,000 receive automatic abatement, reducing both taxpayer burden and IRS correspondence processing costs.

5. Return Preparer Penalties (Section 6695)

Tax preparers face penalties for failure to furnish copies, sign returns, or provide identifying numbers. The AICPA argues that new practitioners making administrative errors in their first filing season deserve the same grace period that FTA provides to taxpayers.

The Economic Argument

The AICPA frames the expansion as revenue-neutral or revenue-positive for the IRS:

• Reduced correspondence processing: Each penalty abatement request costs the IRS approximately $240 to process manually. Automatic FTA eliminates this cost.
• Improved voluntary compliance: Research shows that penalty relief for first offenses increases subsequent compliance rates by 12-18%.
• Reduced Taxpayer Advocate cases: Penalty disputes represent 34% of Taxpayer Advocate Service casework. FTA expansion would redirect resources to higher-priority enforcement.

The IRS assessed $44.6 billion in civil penalties in fiscal 2025. The AICPA estimates their proposals would reduce assessments by approximately $3.2 billion while improving long-term compliance revenue through better taxpayer relationships.

Why This Matters

For tax practitioners: If adopted, expanded FTA would transform penalty abatement from a case-by-case advocacy effort into a systematic first-response tool. Practitioners should track the proposal's progress and begin identifying clients with potential relief eligibility.

For small businesses: The information return penalty expansion alone would protect millions of small businesses from five-and six-figure penalty assessments for first-time reporting errors — a material financial risk reduction.

For international tax compliance: The international penalty expansion would remove one of the most common "gotcha" penalties in tax practice. Practitioners regularly see clients face $50,000+ in penalties for inadvertent non-compliance with obscure foreign reporting requirements. FTA expansion would provide a critical safety net.

For the profession broadly: Every expansion of administrative relief reduces the adversarial nature of tax administration and strengthens the voluntary compliance system. Practitioners spend enormous time on penalty abatement requests that could be automated — freeing capacity for substantive tax planning work.

The key takeaway: The AICPA's FTA expansion proposal could eliminate $3.2 billion in annual first-time penalties across information returns, international filings, and estimated tax underpayments — practitioners should prepare client inventories of pending penalties that would qualify if the IRS adopts these recommendations.