First-Time Abatement (FTA)

First-time abatement, or FTA, is the closest thing the IRS has to a free pass. If a taxpayer has filed and paid on time for the past three years, the IRS will remove certain penalties for a single year as an administrative courtesy, without requiring any explanation of what went wrong. It covers the classic failure-to-file and failure-to-pay penalties on income tax returns, and it applies to businesses as well as individuals.

For foreign-owned LLCs, the crucial limitation is what FTA does not cover. The $25,000 Form 5472 penalty is an information-return penalty under section 6038A, and FTA generally does not apply to it. A founder who calls the IRS expecting the first-time waiver to erase a CP215 penalty is usually told it is unavailable for that penalty type. The realistic path for Form 5472 penalties is a reasonable cause statement showing you acted with ordinary care and fixed the failure quickly.

Where FTA genuinely helps is the partnership side. A multi-member LLC that files Form 1065 late faces a penalty of $255 per partner, per month, for up to twelve months. Two partners and five months late is $2,550. If the partnership has a clean prior history, FTA can wipe that penalty with a phone call or a short letter, no hardship story required. That makes it well worth requesting before spending effort on anything more elaborate.

Strategy follows from the coverage rules. For a late Form 1065, ask for FTA first and keep reasonable cause in reserve; using reasonable cause when FTA would work wastes your free pass. For a late Form 5472 with its pro forma Form 1120, skip straight to reasonable cause, because that is the argument the IRS will actually consider. And in both worlds, the cheapest fix is prevention: calendar the March 15 and April 15 deadlines, and file Form 7004 when you need more time.