IRS penalties can add a large amount to a tax bill, and interest then accrues on them. Many taxpayers do not realize that penalties can often be reduced or removed. Here is how penalty relief works.
1. The most common IRS penalties
The failure-to-file penalty is generally 5% of the unpaid tax for each month or part of a month a return is late, up to 25%. The failure-to-pay penalty is generally 0.5% per month, also up to 25%. There are also penalties for underpaying estimated tax and accuracy-related penalties for substantial understatements.
2. First-time abatement
The IRS offers administrative relief for taxpayers with a clean history. You may qualify if you had no significant penalties in the three prior tax years, have filed all currently required returns, and have paid or arranged to pay the tax owed. First-time abatement typically applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties.
3. Reasonable cause
If you do not qualify for first-time abatement, you may still get relief by showing reasonable cause: that you exercised ordinary business care and prudence but could not comply because of circumstances beyond your control. Examples can include serious illness, a death in the family, a natural disaster, or an inability to obtain records.
4. How to request relief
Relief can be requested by phone for some penalties, in response to a notice, or in writing, often on IRS Form 843. A reasonable cause request should explain what happened, when it happened, how it prevented compliance, and what you did to comply once you could, with supporting documents.
5. What about interest?
Interest generally cannot be removed for reasonable cause. However, when a penalty is removed, the interest charged on that penalty is also removed.
6. If the IRS denies your request
A denial is not necessarily the end. You can generally appeal a penalty abatement denial to the IRS Independent Office of Appeals, where a separate reviewer considers your explanation and the evidence.
Tips for requesting penalty relief
- Check whether you qualify for first-time abatement before arguing reasonable cause.
- Gather documents that support the timeline: medical records, death certificates, insurance claims, or correspondence.
- Explain what you did to comply once the problem ended.
- File any missing returns first.
- Keep copies of every request and IRS response.
Get help from someone who has seen it from the inside
As a former IRS Appeals Officer, Bernie McCarthy knows how penalty relief requests are reviewed. He can evaluate whether you qualify and present the strongest case for removing penalties. Learn more about our penalty abatement services.
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This article provides general information, not legal advice for your situation.