IRS Tax Penalty Abatement and Relief
The IRS might levy a penalty if you fail to file a federal tax return or pay a federal tax by the due date. Fortunately, if that happens to you, there are some ways to have the penalty reduced or eliminated. However, there are different types of IRS tax penalty abatement and relief, and they can apply differently depending on the type of penalty you receive.
Key Takeaways
- Taxpayers with a good compliance history may qualify for the IRS First-Time Abatement program to have failure-to-file, failure-to-pay, and failure-to-deposit penalties waived. This is a one-time offer that hinges on your prior three-year tax history being free of similar penalties or having previous penalties abated for reasons other than first-time abatement.
- The IRS can waive penalties if you demonstrate that your failure to comply with tax requirements was due to reasonable cause. Acceptable reasons include serious illness, natural disasters, or other events beyond your control that prevented timely tax filing or payment. However, ignorance of the law, relying on an advisor, and lack of funds are generally not treated as reasonable causes.
- The IRS can grant penalty relief to large groups of taxpayers in response to administrative issues, such as delays in IRS-issued guidance. Examples include a waiver given to people who didn’t receive automated collection notices during the pandemic.
- If you’re seeking penalty relief, follow the instructions in the notice received from the IRS or file Form 843 to explain your situation and provide any necessary documentation. If your request is denied, you can appeal the decision to the IRS Independent Office of Appeals and further escalate the case to court if needed.
If you don’t file a federal tax return or pay the tax you owe on time, the IRS can hit you with a tax penalty. These penalties can add up to hundreds or even thousands of dollars, so it’s not something to take lightly.
Fortunately, the IRS has some tax penalty abatement (i.e., waiver) options that might be available to you. If you qualify, all or part of your penalty can be erased.
If you’re faced with an IRS penalty, here are some of the different types of tax penalty relief you’ll want to explore.
IRS First-Time Penalty Abatement
If you have a clean record with the IRS over the past few years, you might be able to make a tax penalty disappear through the IRS’s First-Time Abatement program. This type of relief can be applied regardless of the amount of your penalty.
A first-time abatement waiver is only available for the failure-to-file, failure-to-pay, and failure-to-deposit penalties. So, for example, your penalty might be eliminated if you failed to file your federal personal income tax return by the due date. You can also seek relief if you’re penalized for failing to pay any income tax you owe when they’re due. Employers who don’t make timely or proper employment tax deposits can seek first-time penalty abatement, too.
You can request a waiver even if you haven't paid all the tax you owe yet, but any failure-to-pay penalty will continue to increase until the tax is completely paid.
For penalties stemming from personal income tax returns and payments, you’re eligible for first-time penalty abatement if you both:
- filed a return (if required) for the past three tax years before the tax year you received the penalty
- didn't have any other IRS penalties during the prior three years, or if you did it was waived under something other than the first-time abatement program
Employers penalized for employment tax deposit infractions can also seek first-time penalty abatement if:
- they didn’t have four or more failure-to-deposit penalty waivers in the prior three years
- their failure to deposit penalty wasn’t for Electronic Federal Tax Payment System avoidance
Reasonable cause penalty relief
The IRS can also waive certain penalties if you acted with reasonable cause and in good faith. Whether you acted with reasonable cause is determined on a case-by-case basis and depends on all the facts and circumstances.
The reasons that qualify for relief also depend on the type of penalty you owe. However, you can’t eliminate all penalties based on the reasonable cause. For example, the reasonable cause provisions don’t apply to estimated tax penalties.
Let’s take a look at how you can seek reasonable cause relief for a few common types of penalties.
TurboTax Tip:
If you request reasonable cause relief but its records show you qualify for first-time penalty abatement, the IRS will waive your penalty under the first-time abatement program. If you don't qualify for first-time abatement, the tax agency will consider reasonable cause penalty relief. In either case, the IRS will notify you of their decision.
Failure-to-file and failure-to-pay penalties
If you’re hit with an IRS penalty for filing your tax return late or not paying the tax you owe in a timely fashion, the IRS can waive the penalty if you have a good reason for not fulfilling your tax obligations.
Examples of sufficient reasons for failing to file or pay on time include:
- serious illness impacting your ability to file or pay taxes
- death or serious illness of an immediate family member
- fires, natural disasters, or civil disturbances that prevent you from file a return or making a tax payment (e.g., your tax records are destroyed)
- inability to determine the amount of tax due for reasons beyond your control
- unavoidable absences that prevent the timely filing of a return or payment of tax
- system issues that delayed a timely electronic filing or payment
Other reasons may suffice if you can show that you exercised ordinary care and prudence but were still unable to file or pay on time.
Reasons for filing or paying late that generally don’t satisfy the reasonable cause standard on their own include:
- reliance on a tax professional
- ignorance of the law
- mistakes and oversights on your tax return
- lack of funds
Accuracy-related penalties
The IRS can impose an accuracy-related penalty if you underpay the amount of tax you legally owe for example if you don’t pay enough tax because you claimed a tax deduction for which you’re not eligible. To determine if you qualify for reasonable cause relief from an accuracy-related penalty, the most important factor is the extent of your efforts to assess your actual tax liability.
According to the IRS, it will consider several factors to determine whether you qualify for reasonable cause penalty relief, including:
- efforts you made to report the correct tax
- the complexity of your tax issues
- your education, experience, or knowledge of tax law
- steps you took to understand your tax obligation or seek help from a tax advisor
If you relied on a tax advisor, the IRS might also consider whether you provided all the information needed to calculate your tax and your advisor’s experience with your tax situation.
Statutory exception penalty relief
In some cases, the U.S. tax code might provide a provision that triggers penalty relief. For example, tax law states that a penalty for the underpayment of estimated taxes is waived for certain newly retired or disabled people.
Statutory penalty relief might also be available if you received a penalty because you sent a written request for information to the IRS, received incorrect written advice from the IRS in response to your request, and reasonably relied on the incorrect advice.
A late-filing penalty can also be waived by statute if you can show that you properly mailed or e-filed your tax return before the filing deadline.
Penalty relief might also be available under tax statutes if you’re impacted by a federal disaster or serving in a combat zone.
Tax administration penalty relief
The IRS can establish widespread penalty relief policies that impact a large number of people under specific conditions. For instance, this type of administrative penalty waiver might be announced if there’s an IRS delay in releasing tax forms or guidance.
An administrative waiver can be revealed in either a policy statement, news release, notice, or other formal communication stating the IRS penalty relief policy.
For a recent example of an administrative waiver, see the IRS news release announcing $1 billion in penalty relief for approximately 4.7 million taxpayers who didn’t receive automated collection reminder notices from the tax agency during the pandemic.
Interest relief
You should also realize that the IRS charges interest on unpaid taxes…and on unpaid penalties. And that interest keeps growing until your balance is paid in full.
Interest on unpaid taxes generally can’t be waived, but it can be reduced if it’s applied because of an unreasonable error or delay by an IRS officer or employee.
When it comes to interest on a penalty, the IRS will reduce or completely eliminate the interest if the penalty itself is waived.
How to request penalty or interest relief
You’ll receive a notice in the mail from the IRS if you’re hit with a federal tax penalty. Follow the instructions in the letter to request penalty relief.
In some cases, you can ask for penalty relief by calling the IRS. Use the toll-free number shown on your IRS notice.
You can also seek a penalty or interest waiver by filing Form 843 with the IRS. Check the appropriate box for Line 5a and explain why you deserve a waiver in the space provided for Line 7. Documentation supporting your claim may also be required.
Appeal of penalty relief denial
It’s not necessarily the end of the road if the IRS denies your request for penalty relief.
Your first course of action is to ask the IRS Independent Office of Appeals to review the decision to reject your waiver request. Your rejection letter will provide a specific deadline, but you generally have 30 days to file an appeal.
The Office of Appeals will independently review the IRS’s position, your information and documentation, and your own position. You can have an attorney, certified public accountant, or enrolled agent represent you at the appeals hearing. If you can’t afford representation, you might qualify for free or low-cost assistance.
If you don’t agree with the results of this appeal, you can file a formal lawsuit with either the U.S. District Court or U.S. Court of Federal Claims. However, you generally must pay the penalty before taking your case to one of these courts.
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