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First Time Abatement


Lion EA

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I remember someone pointing out this answer, probably with a cite, but I can't find it searching on FTA, First Time Abatement, Substantial Tax Understatement Penalty, and various similar phrases.

I have a client who didn't give me a large 2019 Form 1099-B (had another from the same brokerage -- as he had in prior years -- but the second account was new to 2019 due to the trustee dissolving the client's trust and moving investments to his name personally) and now owes tax in the five figures, ~$1,000 in interest, and a substantial tax understatement penalty of well over $5,000.

Can the FTA be used for an understatement penalty?

Would you try reasonable cause?

I'm open to any advice. (Client notified me in April. I told him I'd take care of it after tax season ended, put a post-it on his file, and forgot until last night when his father emailed me the latest CP2000. It just got buried in my queue of folders during this 1.5 year tax season. So, I have some contributory negligence in this case (son & father are both lawyers) and want to take care of this in the most efficient way.)

What would you do &/or what would you have client do re waiting on the phone?

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I think reasonable cause would take the client telling his own story re thinking all the investments from his trust (set up by grandparents) went into his existing Fidelity account and not knowing he now had a second Fidelity account part-way through 2019. He was away at college with mail going to his parents' home in another state. (Client was neither the grantor nor the trustee but only the beneficiary until the age stated in the trust document. Trustee wrote checks from the trust account to the college for tuition.)

Are you saying not possible penalty abatement at all?

The penalty is call the Substantial Tax Understatement Penalty. Are you saying it's NOT the same as an accuracy penalty? How do I find out if it is or is not an accuracy penalty? If it's NOT an accuracy penalty but is a Substantial tax Understatement Penalty, can we ask for FTA?

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I was putting the cart before the horse. First I need to respond to their tax calculation. The new Fidelity account had a dividends amount plus two amounts for capital gains. Even though the transactions were "covered," the IRS did NOT calculate capital gain but simply used the proceeds to compute tax, interest, and penalty. Is my documentation for our "disagreement" with their CP2000 to prepare a new Schedule D with all the transactions and include the Fidelity statement with proceeds, basis, and capital gains? The letter says "Do not file an amended return." But would you include the first two pages of the 1040 to show that the new dividends are included as well as the new capital gain?

The "new" capital gain drops from $105,000 down to just over $63,000.

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2 hours ago, Lion EA said:

 Is my documentation for our "disagreement" with their CP2000 to prepare a new Schedule D with all the transactions and include the Fidelity statement with proceeds, basis, and capital gains? The letter says "Do not file an amended return."

Very true; never file an amended return with a CP2000 letter.  New schedule D with transactions plus stmts from Fidelity, yes.  They'll take it from there, unless there are other factors you want to include.

If you do decide to include the 1040, write on it in bold "DO NOT PROCESS - supplementary information ONLY."

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"Request non-assertion of accuracy penalty in an audit or underreporter notice due to reasonable cause:  when a taxpayer I audited or has a CP2000 notice, the taxpayer must contest the penalty during the audit or CP2000 process prior to the assessment.  Taxpayers need to argue that they made a reasonable attempt to properly report their tax liability.  Reliance on a tax pro, ignorance of the law, and other factors can be considered in requesting non-assertion of the penalty.   If the accuracy penalty is already assessed, the taxpayer must request audit or CP2000 reconsideration to have the penalty abated."

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  • 3 weeks later...

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