The Internal Revenue Service (IRS) imposes various penalties for failing to pay, file, and deposit taxes, but receiving a penalty notice by the IRS can still be a stressful situation, particularly if the balance due contains failure to file, failure to pay, failure to deposit, or accuracy-related penalties, or information return penalties. The bad news is that the IRS penalty relief process is unavailable to all taxpayers, and even for those who qualify, it’s a long, arduous process that will lead them to beg the IRS to drop or lower various penalties.

IRS Penalty Relief Process (Step-by-Step Guide)

1: Read the IRS Notice Carefully

Use the notice/letter as the starting point. Recognize the notice number, penalty type, tax year, tax period, balance due, response due date, contact telephone number, address to write the response to, and rights to appeal. Don’t take a “one size fits all” approach to an abatement request. The IRS has to have a specific amount of the penalty that you are challenging.

2: Verify the Penalty Is Correct

Not all the first reliefs are penalties. Frequently the punishment is incorrect.

Verify the filing date, payment date, IRS account transcript, extension records, certified mail receipt, payment confirmation, EFTPS deposit records and verify the IRS credited payments correctly. One potential solution if the IRS has the wrong return type or tax period is to correct the mistake.

3: Identify the Best Relief Category

Prior to considering Administrative Relief or Automatic Exemption from Penalty, consider your tax compliance history. For serious events which result in the late return, late payment or failure to pay the payroll tax, discuss reasonable cause. Consider a statutory exception if IRS written advice applies, if it can be shown it was timely sent, if it’s for a disaster, or if it’s for military reasons. If the IRS is in error, ask that it be corrected due to an IRS error or delay.

4: Gather Supporting Documents

A solid IRS penalty relief document could consist of:

Any documentation should be in accordance with the dates of the penalty period. An explanation in a doctor’s letter, filed months after the deadline, will be of little value unless it specifies the taxpayer’s condition during the time covered by the letter.

5: Request Relief by Phone When Appropriate

There is a number of requests for penalty relief which can be dealt with via the telephone. Phone the number listed on the IRS notice. Be sure to have the following information available when completing the Notice: Penalty Type, Tax Period, Taxpayer Identification Number, and Reason for Relief. When calling for IRS penalty relief phone number, be sure to use the number listed on your IRS notice and not one found online.

Phone requests might be effective for administrative waiver requests with simple requirements. But in most cases, a written statement and documents will be required for reasonable cause claims that are complex.

6: Submit a Written Penalty Abatement Request

If the penalty is significant, there are complexities in the facts, the IRS did not grant relief by telephone, more than one tax period is involved, business penalties are involved or a formal record is needed, use a IRS penalty relief written request.

An IRS penalty relief letter or IRS penalty abatement letter should contain the taxpayer’s name, taxpayer ID, tax year or period involved, IRS notice number, type of IRS penalty, request for relief, chronological facts, legal basis, supporting documents and signature.

The common error many people make when writing an IRS penalty abatement letter is to describe hardship, but not relate it to the specific penalty they are seeking to have abated.

7: Use Form 843 When Required or Helpful

Certain Request for Abatement/Refund of penalties, additions to tax, interest and fees may qualify for form 843 penalty abatement. The IRS Form 843 penalty abatement guidelines offer information about when to fill out and when not to fill out the form.

Form 843 isn’t the right form for all tax issues. For instance, it should not normally be applied to ask for the reduction of an income tax. If claiming a refund or requesting an abatement, submit a written statement, and supporting evidence.

In addition, taxpayers who have paid penalty amounts, and want relief from the IRS penalties, should check if there is a tax refund claim deadline. This is particularly crucial for companies and people that are also considering IRS Tax Refunds.

8: Wait for the IRS Decision

The IRS will either approve, grant partial approval, refuse approval or request additional information. The processing time is dependent on IRS workload, the type of penalty and the method of the request (phone vs. writing). Interest and some of the penalties may still accrue if the tax debt is not settled.

9: Appeal a Denied Request

The IRS will reject your abatement request if it does so, read the denial letter right away. If appeals are an option, draft a stronger IRS penalty appeal which demonstrates the IRS’s error in the facts, the application of the law, the failure to consider documents, and or ordinary business care and prudence.

The Independent Office of Appeals may be involved in the IRS’s penalty appeal process. Add to the background supporting evidence, proof of timely filing and/or payment (if applicable), and a clear time line.

How Does the IRS Penalty Relief Process Work?

The IRS penalty relief process usually follows these steps:

  1. Review the IRS notice or account transcript.
  2. Identify the exact penalty, tax year, and tax period.
  3. Determine whether you qualify for IRS administrative penalty relief, IRS reasonable cause penalty relief, a statutory exception, or another form of tax penalty abatement IRS allows.
  4. Gather IRS Penalty Relief Documentation.
  5. Request relief by phone, written statement, or Form 843 when appropriate.
  6. Wait for the IRS decision.
  7. Appeal if the IRS denies your request and appeal rights are available.

What IRS Penalties May Qualify for Relief?

Not all tax penalties are removable, but some of the most typical tax penalties could be eligible to be removed from your tax debt by the IRS penalty removal or IRS penalty reduction programs.

Failure-to-File Penalty

Failure to file is a penalty that is incurred if a tax return is not filed. It can apply to anyone filing a Form 1040, partnerships filing a Form 1065, S corporations, corporations filing a Form 1120 and others. The penalty could escalate rapidly if you do not get penalty relief, so it is important to consider filing a penalty relief as soon as you receive a penalty notice.

Failure-to-Pay Penalty

Failure to pay’ means that there is a failure to pay tax that is due on the tax return due date. You can still apply for failure to pay penalty relief, but penalties and interest can still be charged if taxes are not paid until they’re settled or a payment plan or installment agreement is set up.

Failure-to-Deposit Penalty

If you are a business that is subject to payroll tax deposit requirements, you could incur a failure-to-deposit penalty due to late, short or improper federal tax deposit payments. Care must be given to IRS payroll tax penalty relief and failure to deposit penalty relief as Form 941, Form 940, Form 943, Form 944, Form 945 and EFTPS rules may be complicated.

Accuracy-Related Penalty

Taxpayer may qualify for accuracy-related penalty relief if they are a taxpayer who acted in good faith, relied in good faith upon a professional tax opinion or had a reasonable tax position. The Internal Revenue Service might consider the question of reasonable reliance, reliance by the tax advisor, ordinary business care, and no willful neglect.

Information Return Penalties

Late and/or inaccurate Forms W-2, 1099, 1098, or any other forms could be subject to information return penalty relief. Generally, businesses must demonstrate responsible action, timely remediation and documentation.

Estimated Tax and Dishonored Payment Penalties

The rules and exceptions for estimated tax penalties are different, and there is no reasonable cause in all cases. Penalties for returned checks or dishonored payments also may be considered based on facts and circumstances.

Main Types of IRS Penalty Relief

Administrative Penalty Relief

Administrative penalty relief is provided by IRS rules, policy statements, notices, news releases or other official IRS publications. IRS First Time Abate is the most popular administrative waiver for First Time taxpayers and businesses with a good compliance record.

Those who are looking for relief for a child or children may first look into administrative relief, since the hardship evidence required may not be as significant as it is for reasonable cause. Having timely paid taxes, timely filed returns and no outstanding penalties from your three previous returns could be a more compelling argument for eligibility for penalty relief.

Administrative relief is often the most straightforward option for those taxpayers starting to investigate other IRS Notices & Penalties.

First Time Abate

Failure to file, failure to pay and failure to deposit penalties may be eligible for IRS First-Time Penalty Abatement (FTA), also known as “first time abate. Primarily based on a taxpayer’s track record of good tax compliance.

Even if you don’t have the full tax paid, you might be able to request First Time Abate, although the failure-to-pay penalty may keep accreting until you’re done paying the tax. While individuals and businesses can qualify, not every return and/or type of penalty qualifies. Exclusion of Event Based Filing Requirements, some information reporting penalties and Daily Delinquency Penalties.

Automatic Exemption from Penalty

The more recent version of administrative relief is known as Automatic Exemption from Penalty. It is intended for those taxpayers who have a history of timely compliance, and are eligible, to avoid having to pay any penalties that are automatically assessed to them.

Unlike the regular First Time Abate, the penalty might not be imposed at all. It’s important for taxpayers to still take the time to carefully read any IRS notice. If you are penalized, and you think you should have been allowed to be Automatic Exempt from Penalty, reach out to the IRS or an authorized representative.

Reasonable Cause Penalty Relief

IRS reasonable cause penalty relief depends upon facts and circumstances. The IRS will usually be satisfied that there was fault by the taxpayer in failing to pay taxes despite his/her ordinary business care and prudence.

Treatments for illness or the death of a loved one, unavoidable absences, natural disasters, fires, civil disturbances, inability to obtain records, IRS error or delay, disaster relief, circumstances in combat zones, reliance on incorrect professional advice, records destroyed, business disruption, or a system failure are typical IRS reasonable cause examples.

A good explanation of a reasonable cause standard would include a response to:

For instance, if a self-employed taxpayer was hospitalized prior to the date appointed for filing the Form 1040 and medical records provide evidence that the illness spanned the period of the tax filing and that the taxpayer filed the return as soon as they were able to, then the IRS may consider granting penalty abatement for medical reasons.

Statutory Exception Penalty Relief

There is a difference between statutory and reasonable cause. It’s built on a relief provided for under the tax law. Examples of common statutory exception situations are: receiving incorrect IRS written advice, a timely mail return, federal disaster area relief and military service in a combat zone.

In the event that you obtain written advice from the IRS, retain a copy of your written request, the written advice from the IRS and evidence that the penalty arose from the written advice.

Common Reasons the IRS Denies Penalty Relief

The IRS may refuse to grant relief from penalties if the explanation does not correspond with the time period of the penalty, it is not documented, the taxpayer waited too long to fix the failure or the claim is too vague.

The words “I forgot,” “I was busy” and “I did not know” are generally not strong enough on their own. But, even if someone doesn’t have the money, unless they can demonstrate that they have had substantial mitigating factors and made their best efforts to comply, it is unlikely that they will be able to successfully prove they don’t have the money. If you don’t prove reasonable reliance, that the information was accurate, and that a professional tax judgment was required, then it’s unlikely that you’ll be able to blame your tax preparer.

IRS Penalty Relief for Individuals

Relief for certain hardships such as medical emergencies, death or divorce, disrupted tax filing and lost records is available from the IRS if a person fails to file Form 1040 on time or to pay the taxes due. The IRS offers penalty relief for a taxpayer who missed the tax filing deadline for Form 1040, or failed to pay the taxes due, due to medical emergencies, a death in the family, a divorce, disrupted tax filing, lost records and tax preparer errors. Paying in installments and/or applying for a payment plan if you cannot afford the total tax will help minimize any penalties that may follow.

It may seem like a general term, IRS Penalty Relief, but eligibility will depend on an individual’s facts and circumstances. If a taxpayer is just one late tax return, and has no tax debt or penalties, they may have a different approach than a taxpayer with numerous penalties and unpaid tax debt.

IRS Penalty Relief for Businesses

Payroll tax deposit penalties, Form 941 issues, Form 940 unemployment tax, partnership penalties under IRC 6698, S corporation penalties under IRC 6699, corporate filings, information returns and federal tax deposit errors under IRC 6656 are a few examples of types of business penalty relief.

Records are a key element in IRS small business penalty relief. If the bookkeeper, payroll company or bookkeeper’s software caused the issue, the company should collect emails, reports, confirmation of deposits, corrected filings, and evidence that the management was responsible.

Does Penalty Relief Remove IRS Interest?

Typically, the IRS will impose interest on the penalties. In most cases, penalty interest is eliminated or adjusted along with the elimination or adjustment of any penalties when the IRS eliminates or reduces penalties. In the case of unpaid tax, however, interests will accrue on the unpaid amount until the amount is paid off. IRS error or delay may result in interest being accrued, which may be covered by separate rules for interest abatement.

IRS Penalty Relief Timeline and Checklist

Promptly respond to a notice / letter. Day 1, explain the rule/penalty and the deadline. Before making a call, have notice information and account numbers ready. Prepare your written statement and documents prior to sending. Once submitted, check your IRS account and retain a copy of what you sent and/or sent by fax. Immediately appeal your right of review if denied.

Checklist:

When to Hire a Tax Professional

Try to use a tax professional, tax attorney, CPA or enrolled agent if the penalty is high, payroll taxes are affected, multiple years and/or quarters are involved, IRS refuses to grant relief, appeal is required, or facts are complicated. A professional will be able to determine eligibility for penalty relief, draft the legal argument, compile paperwork and correspond with IRS on behalf of the client.

FAQs About the IRS Penalty Relief Process

What is the IRS penalty relief process?

It involves determining the penalty, deciding on what to use as relief, filing a request for relief, and taking it to an appeal if the IRS does not grant relief.

Can IRS penalties be waived?

Yes. Administrative, reasonable cause, statutory exception, IRS error correction or other acceptable basis may be used to provide administrative relief from certain penalties.

What qualifies for IRS penalty relief?

Qualifications include good compliance history, reasonable cause, IRS written advice, timely mailing, disaster relief, combat zone rules or proof that the penalty was incorrect.

Do I need Form 843 for penalty relief?

Sometimes. Certain abatement or refund claims require the use of Form 843; not all penalty relief requests require the use of Form 843.

How long does IRS penalty abatement take?

Timing varies. Requests made by phone can be answered sooner and written requests as well as Form 843 claims and appeals may take longer as a result of the workload of the IRS and the complexity of the case.

What happens if IRS denies penalty abatement?

If appeal rights are included in the denial letter then you may appeal. Emphasize with facts, legal support and documents.

Conclusion

While not available in all cases, the IRS penalty relief process may be a strong weapon in the hands of taxpayers facing penalties that they believe were imposed incorrectly or they have a legitimate excuse for failing to abide by the rules. Before you begin the process, read the notice, check the penalty, and determine which of the categories of relief is appropriate and collect solid evidence. The better a match you can make between your facts, timeline and documents with the period of penalty, the stronger your abatement request will be.