Late Filer Penalty Relief
Published April 18, 2025
On April 16, 2025, the Internal Revenue Service (IRS) explained the penalty relief options for taxpayers who missed the filing deadline. The IRS encourages taxpayers to file and pay taxes if they are able to do so. Taxpayers who make partial payments toward their tax debt can reduce the accrued interest and penalties.
Some taxpayers may also qualify for penalty relief. There is a First Time Abate administrative waiver for taxpayers who are in good standing with the IRS.
- History of Tax Filing — The first requirement is that you have filed for the past three years and there were no penalties assessed. If you filed for years 2021, 2022 and 2023 and did not have any penalties, you may qualify for First Time Abate relief.
- Additional Requirements — Taxpayers also may have to pass additional tests. Taxpayers cannot have four or more Failure to Deposit penalty waiver codes. They may not have a Daily Delinquency Penalty or an event-based filing requirement.
- First Time Abate Example — Assume that Taxpayer did not fully pay taxes for year 2024. Taxpayer called the IRS and requested penalty relief. The IRS gave Taxpayer a First Time Abate relief up to the date of the request. Six months later, Taxpayer made full payment on the taxes and called again. The IRS then granted another First Time Abate relief for the additional accrued penalty due from April 15 until that full payment.
The IRS emphasizes that if you do not qualify for the First Time Abate relief, there is also a possibility for relief based on your facts and circumstances. If the IRS believes that you are acting in good faith and have financial challenges, it may grant Reasonable Cause relief.
The IRS reminds taxpayers that it is still possible to file after the April deadline and receive a refund. For the 2021 tax year, an estimated one million taxpayers did not file, but they would have qualified for a refundable tax credit, most commonly the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC). Taxpayers with lower incomes should check with an advisor about potentially filing to receive a refundable tax credit. It is important to note that refunds may be delayed if more recent returns have not been filed, and any refund could be used to cover unpaid taxes, past-due child support or federal debts.
If you file for this credit, you can use the "Where’s My Refund?" tool on IRS.gov to check on the status of your refund. You will need your Social Security Number, your filing status and the exact dollar amount of your anticipated refund to use this tool.
IRS Staff Dramatically Reduced
The Internal Revenue Service (IRS) started 2025 with approximately 100,000 employees. There was an initial “early-out” offer and approximately 5,000 IRS employees accepted the deferred resignation. Those who accept the deferred resignation will receive full pay and benefits until September 30, 2025.
A second offer now has been accepted by over 20,000 employees. IRS employees that are over age 40 have 45 days to make a final decision. The net result of both offers and the termination of 7,000 probationary employees will reduce the IRS staff to about 70,000. This is in contrast to five years ago when the IRS had approximately 74,000 staff members.
Former IRS officials discussed these staff reductions at an April 15 event that was sponsored by the Urban-Brookings Tax Policy Center. Former National Taxpayer Advocate Nina Olson is now with the Center for Taxpayer Rights. Olson explained the IRS does have significant responsibilities after April 15 each year. IRS staff must handle taxpayer correspondence, process amended returns and deal with identity theft. Olson stated, "All that work is going to be there. There just will not be people there to handle it. We will start seeing these inventories going like we saw in the pandemic.”
Barry Johnson is a former analytics officer with the IRS. Johnson explained how this reduction of the technology staff at the IRS may have impact on the 2025 tax year. Johnson noted, "A lot of the people who have resigned in the IT function were overseeing that work."
Former IRS staff noted there is a potential loss of billions of dollars in revenue because of these staff cutbacks. In addition, the recent gains in taxpayer service and phone response times are put at risk as large numbers of IRS staff depart.
Will Top Income Tax Rate Return to 39.6%?
Senate tax writers are considering an increase in the top marginal income tax rate from 37% to 39.6%. On April 15, Senate Finance Committee Member Chuck Grassley (R-IA) spoke at a town hall event in Iowa. He explained the Senate Finance Committee is now looking at “pay-fors" to offset some of the tax cuts.
Senator Grassley stated, "It might surprise you that the list of possibilities we have on our working sheet that the members of the Finance Committee… are going to discuss is raising from 37% to 39.6%." This return to the 39.6% rate would only occur for high-income individuals. In 2025, single taxpayers with incomes over $626,350 and joint filers with incomes over $751,600 pay at the top rate.
Under the Tax Cuts and Jobs Act (TCJA), the 37% rate in 2025 is scheduled to increase back to 39.6% in 2026. The bracket will drop to $546,750 for single individuals and $615,100 for married couples filing jointly.
Both the House of Representatives and Senate are diligently working on a reconciliation bill. House Freedom Caucus Chair Andy Harris (R-MD) has indicated there may be a higher rate for individuals with large incomes.
The estimate of the Urban-Brookings Tax Policy Center is that returning the top rate to 39.6% could raise an estimated $360 billion over 10 years. This revenue offset could justify the expansion of the Child Tax Credit (CTC). The CTC increased from $1,000 to $2,000 per child in the TCJA, but it is scheduled to revert to the lower number in 2026. Senator Grassley indicated, "The rationale for it is that we can take that money and use it for an increase in the child tax credit." Another option suggested by tax writers is to use the increase in the top rate to fulfill the campaign promise of the President to eliminate taxes on tips.
House and Treasury leaders have been quite cautious. House Speaker Mike Johnson (R-LA) indicated the focus is primarily on tax cuts. Treasury Deputy Secretary Michael Faulkender was asked specifically about the provision. Secretary Faulkender was also cautious and indicated that options are being studied. He noted "We are investigating and having discussions with Congress about a variety of potential offsets."
Editor's Note: All tax writers in Washington understand the basic principle, "Tax cuts are easy – tax increases are hard." The major tax bill in 2025 is similar in some respects to the massive Tax Reform Act of 1986. There were many tax cuts, but some substantial tax increases to offset tax reductions. This discussion of offsets will be an important debate. Both the House of Representatives and Senate are hopeful they will be able to pass a major tax bill by the middle of 2025.
Applicable Federal Rate of 5.0% for May: Rev. Rul. 2025-10; 2025-19 IRB 1 (16 April 2025)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2025. The AFR under Sec. 7520 for the month of May is 5.0%. The rates for April of 5.0% or March of 5.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”
