SEE - Special Enrollment Exam Quiz: Penalty And Interest Abatement
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Penalty And Interest AbatementQuestion 1 of 14

Which of the following is correct regarding the suspension of interest under IRC § 6404(g)?

Once the 36-month period has expired, the IRS is barred from assessing any additional tax for that year, and the taxpayer is not liable for interest on any later deficiency, even if the required notice is eventually mailed.
The suspension of interest under this provision applies to all taxpayers, and the 36-month period begins on the date the IRS first contacts the taxpayer in writing about the liability, regardless of when the return was due or filed.
A notice stating only that the taxpayer's return is being examined satisfies IRC § 6404(g), so no interest is suspended if such a notice is sent within 36 months after the later of the return due date or filing date.
For an individual taxpayer, if the IRS fails to send a notice stating the liability and its basis within 36 months after the later of the return due date or filing date, interest is suspended on the underpayment but not on the amount shown on the return.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Penalty And Interest Abatement

Practice Penalty And Interest Abatement in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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Question 1

Which of the following is correct regarding the suspension of interest under IRC § 6404(g)?

  1. Once the 36-month period has expired, the IRS is barred from assessing any additional tax for that year, and the taxpayer is not liable for interest on any later deficiency, even if the required notice is eventually mailed.
  2. The suspension of interest under this provision applies to all taxpayers, and the 36-month period begins on the date the IRS first contacts the taxpayer in writing about the liability, regardless of when the return was due or filed.
  3. A notice stating only that the taxpayer's return is being examined satisfies IRC § 6404(g), so no interest is suspended if such a notice is sent within 36 months after the later of the return due date or filing date.
  4. For an individual taxpayer, if the IRS fails to send a notice stating the liability and its basis within 36 months after the later of the return due date or filing date, interest is suspended on the underpayment but not on the amount shown on the return. (correct answer)
Explanation: IRC § 6404(g). For an individual taxpayer who files on or before the due date (including extensions), the IRS must send a notice stating the liability and its basis within 36 months after the later of the return due date or the date the return was filed. If it fails to do so, interest on the additional tax not shown on the return is suspended, but interest on the amount shown on the return is not. Choice D is correct. Choice A misstates the remedy: § 6404(g) suspends interest; it does not bar the assessment of tax, and the suspension ends 21 days after the required notice is provided (IRC § 6404(g)(3)). Choice B misstates the scope and the start date: the rule applies to individual taxpayers, not all taxpayers, and the 36-month period runs from the later of the due date or filing date, not from the date of first written contact. Choice C misstates the notice requirement: a notice stating only that the return is being examined does not state the liability and its basis, so it does not satisfy the provision, and interest would still be suspended if a proper notice is not sent within 36 months.

Question 2

An individual taxpayer did not request an extension of time to file, did not file a 2025 return, and did not pay any of the $12,000 of tax owed by the April 15, 2026 due date. The taxpayer filed the return and paid the full amount on October 1, 2026. Assuming no reasonable cause or other waiver applies, what is the combined amount of the failure-to-file and failure-to-pay penalties under IRC § 6651?

  1. $3,600
  2. $3,060 (correct answer)
  3. $3,360
  4. $3,000
Explanation: IRC §§ 6651(a)(1), 6651(a)(2), and 6651(c)(1). The return was six months late because any part of a month counts as a month. For the first five months, both the failure-to-file and failure-to-pay penalties apply; the 5% failure-to-file rate is reduced by the 0.5% failure-to-pay rate, so the combined rate is 5% per month, reaching the 25% failure-to-file cap. In the sixth month, the failure-to-pay penalty continues at 0.5%. The combined penalty is 25.5% of $12,000, or $3,060. Choice B is correct. Choice A is 30% of the tax, the result of applying 5% for six months without the cap and ignoring the failure-to-pay penalty. Choice C is 28% of the tax, the result of adding a full 3% failure-to-pay penalty to the 25% failure-to-file cap without reducing the failure-to-file percentage for the months both apply. Choice D is 25% of the tax and omits the failure-to-pay penalty for the sixth month.

Question 3

An enrolled agent's client was assessed a failure-to-file penalty and a failure-to-pay penalty in October 2025 with respect to the client's 2024 Form 1040. The client did not request an extension, filed the 2024 return late in July 2025, and paid the balance due in full at that time. The IRS had imposed an estimated tax penalty under IRC § 6654 with respect to the client's 2022 tax year, and that penalty was paid. Apart from that penalty, the client had no penalties for tax years 2021 through 2023 and timely filed every return for those years. The client asks whether the IRS will waive the 2024 penalties under the first-time penalty abatement procedure.

Which of the following is correct regarding the client's request for first-time penalty abatement?

  1. The client does not qualify because first-time abatement requires that the tax for the year of the penalties was paid by the original due date, and the 2024 balance due was not paid until July 2025.
  2. The client qualifies because an estimated tax penalty under IRC § 6654 is disregarded in the first-time abatement lookback, and the 2024 balance due has been paid. (correct answer)
  3. The client qualifies only for the failure-to-pay penalty because first-time abatement does not apply to a failure-to-file penalty when the balance due was paid after the original due date.
  4. The client does not qualify because first-time abatement must be requested before the IRS assesses the penalties, and the penalties here were assessed in October 2025.
Explanation: IRM 20.1.1.3.3.2.1 (First Time Abate). FTA is an administrative waiver that covers the failure-to-file and failure-to-pay penalties under IRC § 6651(a)(1) and (a)(2), among others. For a 2024 penalty, the taxpayer must have filed the same return for the three preceding tax years, 2021 through 2023, and have no unreversed penalties for those years; an estimated tax penalty under IRC § 6654 or § 6655 is disregarded. The client's only prior penalty is the 2022 § 6654 penalty, which does not count, and the 2024 return has been filed and the balance paid, so the client qualifies. Choice B is correct. Choice A misstates the requirement: FTA does not require that the tax was paid by the original due date; it routinely removes failure-to-pay penalties, which by definition arise from late payment. Choice C misstates the scope of FTA: it covers both the failure-to-file and the failure-to-pay penalty, and paying after the original due date does not bar relief from the failure-to-file penalty. Choice D misstates the timing: FTA is applied to penalties that have already been assessed, so the request may follow the assessment.

Question 4

A client was assessed a failure-to-file penalty and a failure-to-pay penalty for 2024. He asked the IRS to abate both penalties for reasonable cause, and the IRS denied the request by a letter that did not offer him an Appeals conference. He received no statutory notice of deficiency and has never had, or been offered, an Appeals conference on the penalties. The penalties remain unpaid. The IRS filed a notice of federal tax lien, and the client timely requested a Collection Due Process hearing. At the hearing, the settlement officer refused to consider the penalty issue, stating that the earlier abatement request was the client's opportunity to dispute the penalties. The IRS sustained the lien and issued a notice of determination.

Which of the following is correct regarding the client's right to challenge the penalties?

  1. Because the client previously requested abatement, the penalties were otherwise subject to an opportunity to dispute, so they may not be raised at the CDP hearing, and the Tax Court would lack jurisdiction over them.
  2. The client's only remedy is to pay the penalties and file a refund claim, because the Tax Court has no jurisdiction over failure-to-file and failure-to-pay penalties.
  3. The client may raise the penalty issue at the CDP hearing and, if the IRS sustains the determination, may petition the Tax Court within 30 days of the notice of determination; the earlier abatement request does not bar that challenge. (correct answer)
  4. The client may not raise the penalties at the CDP hearing because failure-to-file and failure-to-pay penalties are not underlying tax liabilities, but the client may contest them in a future deficiency proceeding.
Explanation: IRC §§ 6320(c), 6330(c)(2)(B) and 6330(d)(1); Treas. Reg. §§ 301.6320-1(e)(3) and 301.6330-1(e)(3), Q&A-E2. At a CDP hearing a taxpayer may challenge the existence or amount of the underlying liability, including assessed failure-to-file and failure-to-pay penalties, if the taxpayer did not receive a statutory notice of deficiency and did not otherwise have an opportunity to dispute the liability. A prior opportunity for a conference with Appeals counts as such an opportunity, but a denial letter that offered no Appeals conference does not. The client received no deficiency notice and was never offered an Appeals conference, so the settlement officer erred by refusing to consider the penalties. After the notice of determination, the client may petition the Tax Court within 30 days (§ 6330(d)(1)). Choice C is correct. Choice A treats the denied abatement request as the prior opportunity to dispute; only a deficiency notice or a prior opportunity for an Appeals conference bars the challenge, and the client had neither. Choice B is wrong because the CDP determination gives the Tax Court jurisdiction even though these penalties were assessed without a deficiency notice. Choice D is wrong because failure-to-file and failure-to-pay penalties are part of the underlying liability for the period, and no deficiency proceeding is available for them.

Question 5

A client filed her 2021 Form 1040 on April 15, 2022, before its April 18, 2022, due date, reporting a balance due of $8,000, which she did not pay. Because of an internal routing error, the IRS did not send the client any notice specifically stating the amount of the liability and the basis for it until November 1, 2025. The client asks whether the interest and the failure-to-pay penalty accruing from April 18, 2025, onward can be suspended.

Which statement is correct?

  1. The IRS may abate the interest for the routing error only if the error was an unreasonable ministerial act, and it may not suspend the failure-to-pay penalty.
  2. No suspension is available because the $8,000 is tax shown on her return, so interest and the failure-to-pay penalty continued to accrue. (correct answer)
  3. Interest and the failure-to-pay penalty are suspended from April 18, 2025, through November 22, 2025, because the IRS did not provide notice within 36 months after the return's due date.
  4. Interest and the failure-to-pay penalty are suspended from April 18, 2025, until the tax is paid, because the IRS's internal error caused the delay.
Explanation: IRC § 6404(g)(2)(A) and (C). The § 6404(g) suspension does not apply to any penalty imposed by § 6651, or to interest, penalties, or other amounts with respect to any tax liability shown on the return. The client's $8,000 was shown on her own return, and the failure-to-pay penalty is imposed by § 6651(a)(2), so neither the interest nor the penalty is suspended, however late the IRS's notice. Choice B is correct. Choice C applies § 6404(g) to self-reported tax and to a § 6651 penalty; its dates (36 months from the April 18, 2022, due date, then 21 days after the November 1, 2025, notice) would matter only for an IRS-identified adjustment not shown on the return. Choice D treats the IRS's routing error as grounds for open-ended relief until payment; no provision suspends interest or the failure-to-pay penalty on self-reported tax until it is paid. Choice A misstates IRC § 6404(e), which covers unreasonable errors or delays in ministerial or managerial acts, not ministerial acts only.

Question 6

Which of the following is correct regarding abatement of a penalty attributable to erroneous written advice from the IRS?

  1. Abatement is available only if the erroneous advice was issued as a private letter ruling in response to a written request filed before the return's due date and the taxpayer disclosed all material facts to the IRS in that request.
  2. The IRS must abate a penalty attributable to erroneous written advice furnished in response to a specific written request if the taxpayer reasonably relied on the advice and provided adequate and accurate information. (correct answer)
  3. The taxpayer must prove that the IRS employee knowingly furnished false advice and that the taxpayer, in reliance on that advice, changed position to the taxpayer's detriment before the return's due date.
  4. If the IRS abates a penalty under this abatement provision, the abatement automatically extends to interest on the resulting underpayment for the entire period of the taxpayer's reliance on the erroneous advice.
Explanation: IRC § 6404(f); Treas. Reg. § 301.6404-3(b). The IRS must abate any portion of a penalty or addition to tax attributable to erroneous written advice furnished by an IRS officer or employee acting in an official capacity, if the advice was given in response to the taxpayer's specific written request, the taxpayer reasonably relied on it, and the penalty did not result from the taxpayer's failure to provide adequate and accurate information. Choice B is correct. Choice A misstates the scope: relief is not limited to private letter rulings and is not conditioned on a request filed before the return's due date. Choice C misstates the required showing: the advice need only be erroneous, not knowingly false, and the taxpayer must show reasonable reliance, not a detrimental change of position before the due date. Choice D misstates the remedy: § 6404(f) reaches interest only to the extent it is imposed on the abated penalty itself (Treas. Reg. § 301.6404-3(c)); it does not abate interest on the underpayment of tax.

Question 7

An individual client filed her 2024 Form 1040 on October 15, 2025, under a valid extension, and paid the $8,000 balance due shown on the return at that time. The IRS assessed a failure-to-pay penalty under IRC § 6651(a)(2) for the period after the April 15, 2025, due date. For tax years 2021 through 2023, the only compliance issue was a small estimated tax penalty under IRC § 6654 for 2022 that was assessed and paid; it was not abated. The client has never received first-time abatement. She asks whether the failure-to-pay penalty can be abated under the IRS's first-time abatement procedure.

Which statement is correct regarding the availability of first-time abatement?

  1. She is not eligible because the 2022 estimated tax penalty was assessed within the three-tax-year lookback period and was not abated.
  2. She is not eligible because the failure-to-pay penalty is not one of the penalties covered by the first-time abatement procedure.
  3. She is not eligible because a return filed under an extension after the original due date does not meet the filing-compliance test.
  4. She is eligible because an IRC § 6654 estimated tax penalty is not treated as a prior penalty under the first-time abatement clean-history test. (correct answer)
Explanation: IRM 20.1.1.3.3.2.1 (First Time Abate). FTA is an administrative waiver that may remove the failure-to-file, failure-to-pay, and failure-to-deposit penalties for a single tax period. The taxpayer must have filed the same return for the three preceding tax years and have no unreversed penalties for those years, except an estimated tax penalty, which is disregarded. For the 2024 penalty, the lookback years are 2021 through 2023. The only prior penalty is the 2022 IRC § 6654 penalty, and it does not count, so her history is clean. Her 2024 return was filed on time under a valid extension, and the balance has been paid. Choice D is correct. Choice A treats the 2022 estimated tax penalty as disqualifying; estimated tax penalties are excluded from the clean-history test whether or not they were abated. Choice B is wrong because the IRC § 6651(a)(2) failure-to-pay penalty is expressly covered by FTA. Choice C is wrong because a return filed by the extended due date under a valid extension is timely filed, so the extension does not affect FTA eligibility.

Question 8

Which of the following is correct regarding abatement of interest under IRC § 6404(e)?

  1. The IRS may abate interest on a deficiency when interest accumulated because an IRS employee unreasonably delayed processing a taxpayer's response to a notice, if no significant aspect of the delay is attributable to the taxpayer. (correct answer)
  2. The IRS must abate all interest on a deficiency whenever a notice of deficiency is mailed more than 12 months after the later of the due date of the return or the date the return was filed.
  3. The IRS may not abate interest on a deficiency because interest is statutory; only the related penalty may be abated on account of an IRS processing delay.
  4. The IRS may abate interest on a deficiency only when the delay was caused by the taxpayer's filed request for an installment agreement and the IRS failed to respond to that request.
Explanation: IRC § 6404(e). The provision is discretionary: the IRS may abate interest attributable to an unreasonable error or delay by an IRS officer or employee in performing a ministerial act, and no significant aspect of the error or delay may be attributable to the taxpayer. Choice A is correct. Choice B misstates the law: there is no 12-month mandatory abatement rule. Choice C misstates the law: interest is not categorically immune from abatement when an IRS processing delay caused it. Choice D misstates the rule: delay stemming from the taxpayer's own installment-agreement request is not the kind of IRS ministerial error covered, and it is not the only basis for abatement.

Question 9

A client filed his 2024 Form 1040 on October 20, 2025, five days after the extended due date. The return showed a balance due of $18,000, which he left unpaid until he entered a direct-debit installment agreement in December 2025. The IRS has already assessed the failure-to-file penalty, which the client does not dispute. The client asks what failure-to-pay penalty rate will apply while the installment agreement is in effect.

Which of the following is correct regarding the failure-to-pay penalty during the installment agreement?

  1. The failure-to-pay penalty is 0.25% per month for the entire delinquency period, because entering the installment agreement relates back to the original due date.
  2. The failure-to-pay penalty drops to 0.25% per month, because a direct-debit installment agreement was in effect and the reduced rate applies whenever an installment agreement is in effect.
  3. The failure-to-pay penalty stops accruing for months the installment agreement is in effect, because direct-debit scheduled payments are treated as payment of the tax.
  4. The failure-to-pay penalty remains 0.5% per month, because the return was filed after the extended due date, so the reduced installment-agreement rate does not apply. (correct answer)
Explanation: IRC § 6651(h). The 0.25% per month failure-to-pay rate applies only to a taxpayer who filed the return on or before the due date, including extensions, and only for months in which an installment agreement under IRC § 6159 is in effect. This client filed five days after the extended due date, so the reduced rate is unavailable and the 0.5% rate continues. Choice D is therefore correct. Choice B ignores the timely-filing condition. Choice C is wrong because an installment agreement does not stop the failure-to-pay penalty from accruing. Choice A is wrong both because the reduced rate, even when available, applies only for months the agreement is in effect, not retroactively, and because this client is not eligible for the reduced rate.

Question 10

An enrolled agent represents a taxpayer whose 2022 Form 1040 was audited. The taxpayer provided every requested document to the IRS examiner by July 2024. The examiner then took no action for 14 months because her supervisor was reviewing the legal position on whether a conservation easement deduction was allowable. The IRS mailed a notice of deficiency in September 2025. The taxpayer asks the enrolled agent to request abatement of all interest that accrued during the 14-month period because the delay was entirely the IRS's fault.

Which of the following is correct regarding the request under IRC § 6404(e)?

  1. The IRS may not abate the interest, because the supervisor's legal review of the conservation easement issue was a substantive act, and IRC § 6404(e) covers only errors or delays in ministerial or managerial acts. (correct answer)
  2. The IRS may abate the interest that accrued more than 180 days after the taxpayer supplied all requested information, because the delay was unreasonable and no aspect of the delay was attributable to the taxpayer.
  3. The IRS may abate all of the interest that accrued during the 14 months, because interest may not be imposed against a taxpayer when the IRS's inaction was the sole cause of the delay.
  4. The IRS may not abate the interest, because IRC § 6404(e) applies only to interest on tax shown on a return, and this case involves a deficiency.
Explanation: IRC § 6404(e)(1). The IRS may abate interest attributable to an unreasonable error or delay by IRS personnel in performing a ministerial or managerial act, provided no significant aspect of the error or delay is attributable to the taxpayer. The provision does not reach delays in substantive acts, such as deciding the merits of a legal position. Because the 14-month delay here resulted from the supervisor's substantive legal review of the conservation easement issue, § 6404(e) does not authorize abatement. Choice B is incorrect because it omits the threshold requirement that the error or delay be in a ministerial or managerial act. Choice C is overbroad: interest continues to accrue during IRS deliberations and is abated only in the narrow circumstances of § 6404(e). Choice D misstates the scope of the provision: § 6404(e)(1) applies to interest on a deficiency, not only to interest on tax shown on a return.

Question 11

A client gave her complete 2024 tax records to her CPA in January 2025. The CPA assured her that he would prepare and file the return by April 15, 2025. When the client called in early May, the CPA said the return had been filed. In August 2025, the IRS assessed a failure-to-file penalty because the return was never filed and no extension had been obtained. The client was not aware of the problem until the IRS notice arrived. She was assessed a failure-to-pay penalty in 2023, so the first-time penalty abatement procedure is unavailable. The client asks the enrolled agent to seek abatement of the failure-to-file penalty on the ground that she reasonably relied on a competent tax professional.

Which of the following is correct regarding the client's reasonable-cause request?

  1. The request should be granted, because the client fully informed a competent tax professional and reasonably relied on the professional's assurance that the return would be filed.
  2. The request should be denied, because the duty to file a timely return is personal and non-delegable, and reliance on an agent to perform the filing is not reasonable cause under the ordinary-business-care standard. (correct answer)
  3. The request should be granted, because the preparer's failure to file is attributable to the IRS, and a taxpayer may not be penalized for the preparer's negligence.
  4. The request should be denied, because the failure-to-file penalty may be abated only for death, serious illness, or a federally declared disaster, and none of those applies.
Explanation: Treas. Reg. § 301.6651-1(c); United States v. Boyle, 469 U.S. 241 (1985). The reasonable-cause exception to the failure-to-file penalty requires the taxpayer to show that the failure was due to reasonable cause and not willful neglect, measured by whether the taxpayer exercised ordinary business care and prudence. Under Boyle, the duty to file a timely return is personal and non-delegable; a taxpayer who entrusts the filing to an agent and relies on the agent's assurance that it was done has not shown reasonable cause. Choice A states the reliance rule too broadly: reliance on a professional can support reasonable cause for a substantive question, such as whether a return is required, but not for the ministerial act of filing. Choice C is wrong because the preparer's negligence is not imputed to the IRS and does not relieve the taxpayer of her own filing duty. Choice D is wrong because reasonable cause is a facts-and-circumstances standard; death, serious illness, and disasters are examples of circumstances the IRS considers, not an exclusive list.

Question 12

A 66-year-old client retired from his job on June 30, 2025. He received wages in the first half of the year and pension payments afterward. His 2025 income tax liability is $14,000, but his withholding totaled only $6,000, and he made no estimated tax payments because he believed his withholding would be sufficient. The IRS has proposed the IRC § 6654 estimated tax penalty. The client has no history of penalties and requests that the enrolled agent obtain a waiver.

Which of the following is correct regarding the client's estimated tax penalty?

  1. The penalty cannot be waived because IRC § 6654 has no reasonable-cause exception, and the first-time penalty abatement procedure does not apply to estimated tax penalties.
  2. The penalty may be waived only for casualty, disaster, or other unusual circumstances, and retirement with a mistaken belief about withholding is not such a circumstance.
  3. The IRS may waive the penalty because the client retired after attaining age 62 during 2025 and the underpayment was due to reasonable cause and not willful neglect. (correct answer)
  4. The penalty can be abated under the first-time penalty abatement procedure because the client has no prior penalties and has always filed on time.
Explanation: IRC § 6654(e)(3). The estimated tax penalty generally cannot be abated for ordinary reasonable cause, and first-time abatement does not apply to it. However, the Secretary may waive the penalty for casualty, disaster, or other unusual circumstances, and may waive it for a taxpayer who retired after attaining age 62 or became disabled during the tax year or the preceding tax year if the underpayment was due to reasonable cause and not willful neglect. The client retired at age 66 in 2025, and his underpayment resulted from a mistaken belief about withholding, so the IRS has authority to waive the penalty. Choice A states the general rule and correctly notes that FTA is unavailable, but it ignores the newly retired exception in § 6654(e)(3). Choice B recites only the casualty, disaster, or unusual-circumstances waiver and omits the retirement and disability waiver. Choice D is wrong because first-time penalty abatement does not apply to estimated tax penalties under § 6654.

Question 13

A married taxpayer filed her 2021 Form 1040 on April 15, 2022, before its April 18, 2022, due date, showing a balance due of $30,000, which she never paid. The return also omitted a $50,000 capital gain, creating an additional tax liability of $12,000. The IRS mailed a notice of deficiency on September 1, 2025, identifying the omitted gain and the additional tax. The taxpayer asks about the effect of IRC § 6404(g) on interest for these amounts.

Which of the following is correct?

  1. Interest on the additional $12,000 is suspended from April 18, 2025, through September 22, 2025, because no notice was mailed within 36 months after the return's due date; interest on the $30,000 shown on the return is not suspended. (correct answer)
  2. Interest on both the reported $30,000 balance and the additional $12,000 tax is suspended from April 18, 2025, through September 22, 2025, because the IRS failed to contact the taxpayer within 36 months.
  3. IRC § 6404(g) suspends the failure-to-file and failure-to-pay penalties, as well as interest, for the period after the 36-month period closes, so no penalty accrues on the additional $12,000.
  4. Interest on the additional $12,000 is suspended only if the failure to mail the notice was caused by an unreasonable error or delay in performing a ministerial act.
Explanation: IRC § 6404(g). For an individual who files a timely return, interest is suspended if the IRS does not provide a notice specifically stating the liability and its basis within 36 months after the later of the date the return is filed or its due date without regard to extensions (§ 6404(g)(1)). The suspension begins the day after the 36-month period closes and ends 21 days after the notice is provided (§ 6404(g)(3)); a notice of deficiency can serve as that notice (Treas. Reg. § 301.6404-4). The rule applies separately to each item, and it never applies to tax shown on the return or to § 6651 penalties (§ 6404(g)(2)(A) and (C)). The 2021 return was filed on April 15, 2022, before its April 18, 2022, due date, so the 36-month period ran from April 18, 2022, and closed on April 17, 2025. The notice of deficiency was mailed on September 1, 2025, and 21 days later is September 22, 2025. Interest on the $12,000 omitted-gain adjustment is therefore suspended from April 18, 2025, through September 22, 2025, while interest on the $30,000 shown on the return keeps running. Choice A is correct. Choice B wrongly extends the suspension to the $30,000 balance the taxpayer reported. Choice C misstates the scope: § 6404(g) does not suspend § 6651 penalties. Choice D describes the IRC § 6404(e) standard (unreasonable error or delay in a ministerial or managerial act), which is not the test for the § 6404(g) suspension.

Question 14

Which of the following is correct regarding the IRS first-time penalty abatement procedure?

  1. First-time penalty abatement may be used for an accuracy-related penalty under IRC § 6662 if the taxpayer's only prior penalty in the preceding three tax years was an estimated tax penalty and all required returns were filed.
  2. First-time penalty abatement may be granted for the estimated tax penalty under IRC § 6654 if the taxpayer has a clean compliance history for the preceding three tax years and the underpayment was not due to willful neglect.
  3. First-time penalty abatement may waive an IRC § 6651 failure-to-file or failure-to-pay penalty without a reasonable-cause showing when the taxpayer has a clean history for the preceding three tax years, has filed all required returns, and has paid or arranged to pay the tax. (correct answer)
  4. First-time penalty abatement is available only after the taxpayer files Form 843 with the IRS, pays the applicable user fee, and makes a reasonable-cause showing in writing to the IRS for the specific penalty.
Explanation: IRM 20.1.1.3.3.2.1 (First Time Abate). First-time abatement is an administrative waiver, not a reasonable-cause determination. A taxpayer may have an IRC § 6651 failure-to-file or failure-to-pay penalty waived without showing reasonable cause if the taxpayer has no penalties for the preceding three tax years, has filed all currently required returns or has a valid extension, and has paid or arranged to pay the tax due. A prior § 6654 estimated tax penalty does not count against that clean history. Choice C is correct. Choice A is wrong because first-time abatement does not apply to the accuracy-related penalty under § 6662. Choice B is wrong because first-time abatement does not apply to the estimated tax penalty under § 6654. Choice D is wrong because first-time abatement may be requested by phone, by letter or on Form 843, carries no user fee, and requires no reasonable-cause showing.