If you have been penalized for missing the tax filing deadline, but you have been tax compliant in all of your tax years, you can easily avoid these penalties with the IRS’s First-Time Penalty Abatement (FTA) policy. This relief is allowed by the IRS if you have been compliant with the tax laws in the previous three years and are paying (or have paid) the tax that is due.

If you were otherwise compliant with filing your deadline, the IRS has three primary ways to remove or lessen your penalties:

Do not despair if you’ve filed your tax return and are still getting a letter from the IRS stating they’ve imposed a penalty! Don’t get all stressed out if you filed your tax return on time but the IRS still issued a penalty notice. As many tax filers believe that if they file within the required time then it cannot hurt them, they look for IRS penalty relief if they have timely filed. Unfortunately, this isn’t always the case.

Timely filing of a tax return may help prevent failure to file penalty, but it does not help prevent failure to pay, estimated tax underpayment, interest or failure to pay due to a rejected payment, IRS processing delay or payment being applied to the wrong year. There are different types of penalty relief the IRS recognizes along with First Time Abate, reasonable cause, statutory and administrative penalty relief.

Why Did the IRS Charge a Penalty If You Filed On Time?

Filing on time is not the same as paying on time

One of the most common misconceptions is that filing a tax return on time is the same as the IRS won’t be able to impose penalties. There is a common misconception that if you file a tax return by the deadline, then you won’t be subject to penalties from the IRS. In fact there is a difference between filing and paying.

A penalty will be imposed if you have not paid the entire tax balance to the original due date even though you filed Form 1040 on time. This is why I (as a taxpayer) often get a penalty from the IRS, even though I noticed. This is why I as a taxpayer, often pay an IRS penalty even though I noticed.

Another issue with a tax extension is that it can be confusing. Typically an extension is to give you more time to file, not more time to pay. The IRS may still charge you a late tax payment penalty and interest if you filed an extension, but did not pay the taxes on time.

The most common reason: unpaid tax balance

The most typical case is a case in which a taxpayer files in time, but he or she hasn’t paid all the taxes owed. This can occur when there is an income discrepancy caused by an unanticipated 1099 income source, self-employment tax, or investment income, as well as a lack of withholding on a W-2, missed quarterly estimated payments or cash flow issues.

Suppose, for instance, that a taxable person is filing before April 15, and has $8,000 tax due. The return comes back on time, but 2 months late. This could be considered a failure to pay penalty issue with the IRS since it was not paid by the deadline. The failure-to-pay penalty is typically half a percent of the unpaid tax for each month (or part of month) it remains unpaid up to 25 percent, according to the IRS.

Failure to Pay Penalty vs Failure to File Penalty

What is the failure-to-pay penalty?

Typically, the penalty for failure to pay is imposed when you submit your return and don’t pay the amount you owe by the deadline. This is the most common result to be encountered when looking for IRS failure to pay penalty which has been filed timely.

Typically the normal rate is 0.5% per month or partial month up to 25%. Interest may be waived under some of the approved installment agreements; however, interest could still accrue until the balance is paid.

What is the failure-to-file penalty?

Failure to file the return will subject it to the failure to file penalty. The IRS has said that the amount of this penalty would be based on the tax due for the month or part of the month that the tax was late, up to a maximum of 25%.

What’s different here is the failure-to-file penalty won’t be avoided just by filing in time, but a failure-to-pay penalty might be. This is the actual distinction between failure to pay penalty vs failure to file penalty.

What IRS Notice Did You Receive?

Common IRS notices after timely filing

The problem often comes to the taxpayer’s attention when he or she receives a penalty notice or balance due notice from the IRS. Typical examples are CP14 when there are balance due problems with an individual and CP161 when there are certain business balance due problems. The notice may itemize the tax, penalties and interest.

When checking the notice, you’ll need to note the following:

• Tax year
• Type of penalty
• Penalty amount
• Interest amount
• Date the IRS says payment was due
• Whether the IRS claims the return was late
• Response deadline
• Phone number on the notice

The IRS typically instructs taxpayers to do what it says on a notice and some of the requests for penalty relief can be made over the phone. The IRS will notify the taxpayer if they are not able to approve relief over the phone that they should write a letter or fill out Form 843.

What if the IRS notice is wrong?

The IRS penalty notice doesn’t always have the correct information. Common issues are if the IRS received a penalty notice with an incorrect filing date, or if a payment was made on the wrong tax year or tax period, or if a Direct Pay payment was made on the wrong tax period, or if an e-file was accepted by the IRS, but the payment was not received.

To request IRS penalty relief for an incorrect penalty, be sure to bring documentation to the table. These can be e-file acceptance confirmation, IRS Direct Pay confirmation, EFTPS records, bank statements, certified mail receipts, tax software records and IRS account transcripts.

Can You Get IRS Penalty Relief If You Filed On Time?

Yes, but, it is not automatic to get penalty relief. In general, the IRS will require a legal or administrative justification to waive the penalty. Simply, it is possible to pick from a few primary choices:

1. First Time Abate
2. Reasonable cause penalty relief
3. Statutory exception
4. Administrative waiver

This will depend on the facts surrounding the late payment or disputed penalty, as well as your compliance history, and the type of penalty. This is where a properly structured IRS Penalty Relief Program page or IRS Penalties Relief Service can be useful in determining if a taxpayer should file a First Time Abate application, reasonable cause application or IRS Form 843 Penalty Abatement, or IRS Penalty Appeal.

Option 1: First Time Abate

What is First Time Abate?

First Time Abate is an IRS administrative ruling that permits those taxpayers who have a good compliance record to receive an abatement. It can be helpful in situations where you typically file and pay your taxes correctly, but had a single issue like a missed payment, rejected payment or a balance due issue.

If the IRS considers you to be a first time abate, but you apply for reasonable cause relief, the IRS will apply First Time Abate based on good compliance history.

Who may qualify?

You might qualify if you have filed the returns required by the rules, and paid or arranged to pay the tax that should have been paid, and if you do not have recent disqualifying penalties. When a taxpayer has committed a one-time error and the penalty was filed before the deadline, this is typically the easiest way to get the IRS to waive the penalties.

To request, call the IRS number on the notice and request to see if the penalty is eligible for First Time Abate. Be prepared with notice, year, social security number or EIN and payment information.

Option 2: Reasonable Cause Penalty Relief

What counts as reasonable cause?

Reasonable cause is usually defined as you used “ordinary business care and prudence” and yet you failed to comply due to circumstances that were beyond your control. According to the IRS and IRS Appeals, reasonableness and good business judgment (a facts-and-circumstances standard) will be considered.

Worse cases could be serious illness, hospitalisation, death of a close relative, natural disaster, loss of records, a failure in the bank system or a problem with the IRS or the tax software used to file taxes that caused late payment.

If the issue was due to a family emergency, an IRS resource on IRS penalty relief if family emergency occurred will show taxpayers what to collect to file for relief, which includes hospital records, a doctor’s letter or a death certificate.

Weak reasonable cause arguments

Often explanations will be weaker if presented on their own. Saying that you forgot, didn’t have the money or your preparer should have done it, won’t suffice if there are not stronger supporting facts.

Here the Supreme Court’s ruling in the case of United States v. Boyle is significant. In the case of a late filing, either for cause or otherwise, the Court did not rule that it was reasonably cause when merely relying upon an agent to file a return.

In a few cases, the doctor’s reliance might still factor into the penalties, but it needs to be reasonable and in Neonatology Associates, the court did not find reasonable good faith reliance based on the facts, and the taxpayers’ reliance on the professional was found to be unreasonable.

How to Request IRS Penalty Relief After Filing On Time (Step-by-Step)

1: Confirm which penalty was charged

Use the notice as the beginning. Does the IRS have a failure to pay a penalty, failure to file a penalty, estimated tax underpayment penalty, accuracy-related penalty, and/or interest? It’s not possible to make a substantial penalty relief request until you have an understanding of what you are challenging.

2: Confirm that the return was filed on time

Collect evidence in support of the timely filing. Acceptance letter for e-filing, certified mail receipt, IRS account transcript, tax software filing confirmation, CPA confirmation and/or IRS online account records are all helpful documents. The IRS has an online process for accessing all of the following: balance, payments, tax records and account information.

3: Check whether your payment was late, rejected, or misapplied

Obtain confirmation from IRS Direct Pay, EFTPS records, credit card receipts, canceled checks and bank records. If you paid in a timely fashion and the tax penalty relief can be obtained, the most important thing is whether you can provide IRS proof of timely and proper payment.

If the problem was caused by tax software, refer to a section like IRS penalty relief which states that tax software didn’t explain the timeline, acceptance notices, software confirmation, rejection messages or any other support communications.

4: Choose First Time Abate or reasonable cause

If your compliance record is clean, and the penalty meets the requirements of First Time Abate, use First Time Abate. If there were specific reasons that you couldn’t help, use reasonable cause. Sometimes, a taxpayer may request both, but the facts must be accurate, and well documented with the IRS.

5: Call the IRS or submit a written request

If it’s a simpler case, a telephone call to the IRS might suffice. In more complicated cases, it is typically preferable to get written penalty abatement. In the event that the IRS is unable to grant the relief over the phone, they might be able to grant the relief in writing by submitting Form 843: Claim for Refund and Request for Abatement.

6: Use Form 843 if needed

This form is for individuals to request a refund or cancellation of certain taxes, penalties, interest, fees and additions to tax. It may be helpful in cases where it’s needed to qualify for penalty abatement on the penalty Form 843, and a written record with the appropriate supporting documents is required.

7: Appeal if denied

In the event the IRS refuses to grant penalty relief, have a quick look at the appeal options. IRS Appeals says that some of the penalties that Appeals might remove include failure-to-file and failure-to-pay penalties.

What Documents Do You Need?

For most penalty relief requests, gather:

• IRS notice or letter
• Tax return copy
• Proof of timely filing
• Proof of payment or attempted payment
• IRS account transcript
• Payment confirmation
• Bank records
• Certified mail receipt
• Tax software confirmation
• Preparer correspondence

Attach any supporting documentation like hospital records, doctor letters, disaster records, insurance claims, police reports, bank letters or IRS written correspondence for reasonable cause. A reasonable cause letter to IRS should include the following: timeline, kind of penalty, facts, request for relief and ordinary care and prudence.

Fees, Charges, Penalties, and Expected Costs

Typically the Internal Revenue Service (IRS) failure to pay penalty and interest is the primary expense. A penalty of 0.5% per month (or part of a month) is typically applied and may go up to 25%. Interest may run past the time of payment of the tax. Sometimes, a failure-to-pay rate of 0.25% per month is offered as a lower rate on certain installment agreements – but not always on these agreements are the interest charges eliminated.

Professional costs vary. The review of a simple IRS notice will be less expensive than a complete penalty appeal or tax debt resolution case. Larger penalties, business penalties, payroll tax problems, and IRS collection penalty problems typically will need more detailed representation.

An IRS penalty page for IRS penalty relief should make it clear that sometimes penalties are removable but interest relief is not as readily given. The interest on unpaid tax usually runs until the tax is paid, except for interest that is related to an abated penalty, in which case the interest can be adjusted.

Common Mistakes to Avoid

Don’t think that if the return is filed on time, that all the penalties are waived. Please don’t forget the notice day. Please do not request a penalty waiver without specifying what type of penalty. If your only reason for not paying is “I could not afford to pay,” you must be able to produce specifics to back up the ordinary care, prudence and inability to pay.

Don’t fault a tax preparer, tax software, or a bank without reasons. In case you were claiming that you have rejected any IRS payment or that you had a mistake in the software that caused an IRS penalty or that your CPA caused an IRS mistake, be sure to include documents that identify this issue and when it occurred.

Should You Call the IRS, File Form 843, or Hire a Tax Lawyer?

It may be appropriate to call the IRS if it’s a simple First Time Abate request, a small balance due notice or if it’s a straightforward payment timing issue.

Form 843 might be better for those situations where the written reasonable cause requests, penalties have been paid, the documentation is complex or where relief by phone was denied.

If you have received a large penalty, are receiving multiple penalties, are having payroll tax problems, have IRS penalty appeal process issues or have your IRS penalty dispute process begun, a tax lawyer may be the right person for you. When professional IRS penalty relief assistance is required, it’s not something that should be done when it becomes a matter of urgency.

If penalty was assessed, the question is not whether the IRS can assess a penalty – for those who need IRS penalty relief. It often can. However, the question is, whether the penalty can be eliminated, lowered, amended, or challenged.

FAQs

Can I get IRS penalty relief if I filed on time?

Yes. You are eligible if you fall under a First Time Abate, reasonable cause, statutory exception or administrative relief.

Why did I get a penalty if I filed my taxes on time?

Typically due to failure to pay the taxes on time in spite of having filed the tax return on time.

Can IRS waive a failure-to-pay penalty?

Yes, in some cases. First Time Abate/Reasonable cause relief may be available.

Does an extension give me more time to pay?

Generally, no. An extension is not used to delay the payment of the tax, it is used to delay the filing of the tax.

Do I need Form 843 for penalty abatement?

Not always. Certain requests can be made by phone, but in situations where it is necessary to make a request or claim a refund, Form 843 may be helpful.

What if my IRS payment was applied to the wrong year?

Collect all the evidence of payments and contact IRS to ask for a correction. If the payment has been made in time, request the lowering of the penalties.

Can IRS interest be removed?

Interest relief is less than penalty relief. The interest may be adjusted in respect of an abated penalty, but the interest on unpaid tax will normally run until the tax has been paid.

Should I hire a tax lawyer for IRS penalty abatement?

If the penalty is significant, the IRS refused relief, business penalties are at stake or an appeal is desired, it may be helpful to hire a tax lawyer.

Conclusion

Penalty relief with the IRS may be available if you have fulfilled the requirements for timely filing, but it all depends on the type of penalty, payment history and the notice and supporting documents. First, read the IRS notice carefully to see if they’re about failure to pay, or if it’s a different type of penalty; and collect evidence of attempts to file and pay. Consult your tax professional if the amount is large or you have been denied tax relief by the IRS, before the response deadline.