Tax Resolution
Before you agree to pay it,
find out how much of it is penalty.
On a multi-year balance, penalties and the interest running on them are routinely a third or more of the total. That portion is often removable, and removing it is cheaper than financing it.
The short answer
Can I get IRS penalties removed?
Often, through one of three routes. First-Time Abate is an administrative waiver granted where the preceding three years carry no penalties, you have filed all required returns, and any tax due is paid or arranged. It is close to automatic when the criteria are met. Reasonable cause relief applies where circumstances beyond your control prevented compliance despite ordinary business care and prudence. Statutory exception applies where you relied on incorrect written advice from the IRS.
Interest on the underlying tax is generally not abatable, because it is statutory compensation for the use of money rather than a sanction. Interest charged on a penalty is removed when the penalty is.
What the penalties actually cost
| Penalty | Rate | Cap | Relief routes |
|---|---|---|---|
| Failure to file | 5% of unpaid tax per month or part month | 25% | First-Time Abate, reasonable cause |
| Failure to pay | 0.5% of unpaid tax per month, halved while an installment agreement is in force | 25% | First-Time Abate, reasonable cause |
| Failure to deposit | 2% to 15% depending on lateness | 15% | First-Time Abate, reasonable cause |
| Accuracy-related | 20% of the underpayment | — | Reasonable cause and good faith, including reliance on professional advice |
| Estimated tax | Interest-rate based on the underpaid installment | — | Narrow statutory waivers only |
| Trust Fund Recovery | 100% of unpaid trust fund taxes, assessed personally | — | Contest responsibility or wilfulness; not a penalty relief matter |
Two observations follow from that table. The failure-to-file penalty is ten times the failure-to-pay penalty, which is why filing a return you cannot pay is always better than filing nothing. And where both apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount, so the combined maximum is 47.5 per cent rather than 50.
The order matters more than the argument
This is the part that separates a competent penalty request from a wasteful one. First-Time Abate can be used for one tax period, and using it consumes a clean three-year compliance record. Reasonable cause has no such limit and can be argued on every year the facts support.
So the sequence is: identify the years where a genuine reasonable cause argument exists, argue those on reasonable cause, and reserve First-Time Abate for a year that has no such argument. A request that leads with First-Time Abate on the first year in the sequence, which is what most automated services do, frequently burns the waiver on a year that would have been abated anyway. The two routes are compared in full here.
Making a reasonable cause argument that works
Reasonable cause is a facts-and-circumstances test, and requests fail far more often on documentation than on merit. The standard the IRS applies is whether you exercised ordinary business care and prudence and were nevertheless unable to comply.
What generally supports it
- Serious illness, incapacity or death affecting you or an immediate family member, with the dates matching the period of non-compliance.
- Destruction of records by fire, flood, natural disaster or theft.
- Inability to obtain records despite documented, reasonable effort.
- Reliance on a tax professional who was given complete and accurate facts, particularly for accuracy-related penalties.
- An unavoidable absence, such as military deployment or extended hospitalisation.
What generally does not, on its own
- Lack of funds. Inability to pay is not reasonable cause for failure to pay, though the reason for the shortage sometimes is.
- Ignorance of a filing requirement, absent unusual circumstances.
- An error by an employee or bookkeeper, where you did not exercise supervision.
- Being too busy, or the complexity of the return.
The determining detail is almost always chronology. A request that says a serious illness caused the failure, and attaches records showing hospital admission dates that align with the filing deadlines and a return filed shortly after recovery, succeeds. The same facts asserted without dates and documents usually does not.
Where this fits in a larger case
Penalty abatement is usually the last step of a resolution rather than the first, because First-Time Abate requires filing compliance and, for the failure-to-pay penalty, a payment or an arrangement in place. If you have unfiled returns, those come first. If a collection alternative is needed, that is usually established alongside, and the reduced failure-to-pay rate under an installment agreement begins immediately. The order is not arbitrary, and running it backwards costs money.
Penalty Abatement FAQ
Questions about IRS penalties.
Can IRS penalties be removed?
Frequently, through one of three routes. First-Time Abate is an administrative waiver available where the previous three years are clean, and it is granted almost mechanically. Reasonable cause relief applies where circumstances outside your control prevented compliance despite ordinary business care. Statutory exception applies where you relied on written advice from the IRS itself. Interest on the underlying tax is generally not abatable, but interest charged on an abated penalty comes off with it.
What counts as reasonable cause?
Serious illness or death affecting you or an immediate family member, destruction of records by fire, flood or other casualty, an inability to obtain records despite reasonable effort, or reliance on erroneous professional advice given the full facts. What does not count, standing alone, is lack of funds, a mistake by a bookkeeper you did not supervise, or simply not knowing the requirement. The test is whether you exercised ordinary business care and prudence and were nevertheless unable to comply.
What is First-Time Abate?
An administrative waiver of failure-to-file, failure-to-pay and failure-to-deposit penalties for a single tax period, available if you filed all required returns, have no penalties in the previous three years, and have paid or arranged to pay any tax due. It is not discretionary in the ordinary sense: if you meet the criteria, it is granted. It can often be requested by telephone and resolved on the call.
Should I use First-Time Abate or reasonable cause first?
Reasonable cause first, if you have a genuine reasonable cause argument. First-Time Abate consumes a clean three-year record and can only be used for one period, so spending it on a year that would have qualified for reasonable cause relief wastes it. Argue reasonable cause on the years that support it and reserve First-Time Abate for a year that does not. Getting this order wrong is the most common avoidable error in penalty work.
How much of my balance is penalty?
Often a great deal more than people expect. The failure-to-file penalty runs at five per cent of unpaid tax per month up to twenty-five per cent, and failure-to-pay adds a further half per cent per month up to twenty-five per cent, with interest compounding daily on the whole balance. On several years of unfiled returns, penalties and the associated interest routinely make up a third or more of what is owed. Your account transcript itemises this precisely.
Can I appeal a denied abatement request?
Yes. A denial can be taken to the IRS Independent Office of Appeals, and penalty abatement appeals succeed at a meaningfully better rate than initial requests, because Appeals weighs the hazards of litigation while the initial reviewer applies a checklist. A first denial is not the end of the matter, and treating it as one leaves money on the table.
Keep Reading
What usually has to happen first.
Worth Checking
Some of what you owe
may not survive scrutiny.
Penalties and the interest running on them are routinely a third of a multi-year balance. Establishing how much before you agree to a payment plan is fifteen minutes well spent.