The Internal Revenue Service (IRS) may try to waive or lower penalties that are placed on your tax account based on the IRS penalty relief requirements. These penalties may also be imposed if a return is late, late payments of tax, missed payments of payroll, underpayment of estimated tax or incorrect or missing information returns. Penalty relief, or IRS Penalty Abatement, is not a way to get rid of the tax, it’s simply a way to get the tax penalties to be removed. Instead, it can lessen the penalties and in many instances the interest that is attached to penalties.
IRS Penalty Relief Requirements by Relief Type
First Time Abate Requirements
To qualify for IRS penalty abatement for First Time Abate, the following IRS requirements must be met:
- A clean prior three-year compliance history
- Required prior returns filed
- No disqualifying prior penalties
- Current returns filed
- Tax paid or payment arrangement in place
- Penalty type eligible for administrative relief
Reasonable Cause Requirements
You’ll need to demonstrate that, even with proper business care and prudence, you were unable to comply, for reasonable cause. The explanation must show the event in connection to the missed deadline and/or the incorrect filing.
Medical records, death certificates, insurance reports, police or fire reports, disaster declarations, bank records, proof of mailing, tax professional correspondence, account transcripts and payment plan confirmation are just a few examples of IRS penalty relief documentation that would be helpful.
Statutory Exception Requirements
If there is a statutory exception, state what exception and then demonstrate with facts that you are meeting this exception. If there is IRS penalty relief based on “return was sent” documents, for instance, a Certified Mail receipt or an Approved Private Delivery Service record might be required. It may be necessary to submit documentation that your address/place of business was in a covered disaster area.
Who Qualifies for IRS Penalty Relief?
If you have a good compliance record with the IRS, you have filed all required tax returns, paid the tax (or made arrangements to pay) or you can show that you were unable to solve the problem because of circumstances that were out of your control, then you may be eligible for IRS penalty relief. Typical qualifying events are: serious illness, loss of a family member, natural disaster, inability to obtain records, timely mailing problems or reliance on incorrect written advice from the IRS.
Each penalty has their own regulations. The taxpayer who is eligible for First Time Abate doesn’t have to prove as much as a taxpayer would for IRS reasonable cause penalty abatement. A business that has accrued payroll tax penalties will likely require more supporting documentation than will an individual who has just been late with his or her 1040 for the first time.
If you’re considering the IRS penalty relief process, determine if your problem is due to failure-to-file, failure-to-pay, failure-to-deposit, accuracy-related, estimated tax, information return or dishonored payment.
Main Types of IRS Penalty Relief
Administrative Waiver and First Time Abate
One of the most popular types of IRS penalty relief is called First Time Abate. It is intended for those taxpayers who otherwise follow tax laws, but made a first time error. It could be for failure to file, failure to pay and failure to deposit penalties.
The IRS First Time Abate rules tend to be based upon your past compliance record. Generally, a prior three years of the same type of return (where applicable) are required to be filed and disqualifying penalties are not required for those three years. You must also have the required filing and be up-to-date on tax payments and arrangements.
Automatic Exemption from Penalty
A newer relief concept by the IRS is Automatic Exemption from Penalty in which the IRS has records that the taxpayer meets the criteria for the relief. First Time Abate is the kind of relief that taxpayers are likely to seek after a tax penalty is issued, but this relief can actually help to prevent a penalty from ever being issued in the first place.
The core concept is the same: History of basic safety works. The IRS looks at past compliance with the rules for many businesses and for individuals. Quarterly compliance history may be used in a review if deposits were an issue with payroll. However, it’s important for taxpayers to watch their accounts, as not all penalties will be removed by automatic relief.
| Feature | First Time Abate | Automatic Exemption from Penalty |
|---|---|---|
| How relief is granted | Taxpayer usually requests it | IRS may apply it automatically |
| Penalty timing | Penalty assessed, then removed | Eligible penalty may not be assessed |
| Evidence needed | Usually IRS account history | IRS system review |
| Main requirement | Clean compliance history | Clean compliance history |
| Best for | Prior or current assessed penalties | Eligible processed returns |
Reasonable Cause Penalty Relief
The term reasonable cause is used when the ordinary care and prudence of the taxpayer was not fulfilled. It is a facts and circumstances argument, rather than a right it is. The IRS will consider what was done, when, if it affected your filing and/or payment ability, and how fast you corrected it.
Good reasonable cause coverage examples range from serious illness, death or unavoidable absence, fire, flood, natural disaster, destroyed records, IRS system problems, to business disruptions which are beyond the taxpayer’s control. If the problem has to do with complicated tax law, there may be some reliance on a qualified tax professional that will help, but that isn’t typically enough to say “my preparer made a mistake.”
Statutory Exception Penalty Relief
Relief granted by a particular provision of the law is a statutory exception. These can include relying on wrong written IRS guidance, timely mailing, federal disaster relief, combat zone relief or other special exceptions.
When it comes to IRS penalty abatement it is essential to have a written proof. If you have taken the IRS’s advice from a written document, be sure to preserve the written request, the IRS’s response and an explanation of how you took the IRS advice. Retain certified mail receipts, proof of private delivery service and proof of mailing the package to the IRS address.
IRS Penalties That May Be Eligible for Relief
Failure to File Penalty
Failure to file penalty: If a required return is filed after due date. Can cost a lot of money, particularly if taxes are due. There are IRS penalty relief options available such as First Time Abate, reasonable cause or a statutory exception.
Failure to Pay Penalty
The Failure to pay penalty is when tax reported on a return is not paid before the due date. Failure to pay penalties may lead to a reduction in tax penalties though not elimination. Making the balance or paying by a plan may assist in preventing more penalties and interest.
Failure to Deposit Penalty
The IRS failure to deposit penalty typically applies to employers who fail to pay payroll taxes when they are due, the correct amount of tax, or the correct way. The relief might be based on the deposit schedule, compliance, EFTPS records and whether the business took immediate action to remedy the problem.
Accuracy-Related Penalty
Underpayment of tax due to negligence, failure to follow rules and/or understatement of tax by a substantial amount could be subject to an accuracy related penalty. Generally this is not the primary choice for First Time Abate. It is more important to have reasonable cause and good faith.
Information Return Penalties
Penalties for information returns may be imposed on forms like W-2s, 1099s, partnership schedules, or other types of reporting forms. If the tax payers were responsible before and after the failure, they corrected the forms, and had systems in place to comply with the failure, then the relief may be due.
Estimated Tax and Dishonored Payment Penalties
Estimated tax penalties are subject to different rules and may include safe harbors, annualized income, retirement, disability, disaster, casualty and other special situations. A discredited check or non-payment penalty might be eligible to be released if facts are provided, including the taxpayer’s reasons for the non-payment or bank mistake.
How to Know Which IRS Penalty Relief Option to Use
Put the type of penalty at the beginning. Before paying the penalty for failure to file, failure to pay or failure to deposit, review the IRS First-Time Penalty Abatement (FTA) eligibility. Consider reasonable cause or statutory exception relief if you do not qualify or, if your facts are better under another argument.
| Situation | Best Relief Argument |
|---|---|
| First late filing after years of compliance | First Time Abate |
| Serious illness prevented timely filing | Reasonable cause |
| Return mailed on time but processed late | Statutory exception |
| Payroll deposit missed by clean-history business | First Time Abate or reasonable cause |
| Incorrect written IRS advice caused penalty | Statutory exception |
| Complex tax issue handled in good faith | Reasonable cause |
When a taxpayer is being researched by the IRS on Notices & Penalties, it is not a given that each penalty is treated the same. The best argument is the one that is consistent with the notice, tax period and available evidence.
How to Request IRS Penalty Relief
1: Read Your IRS Notice Carefully
Determine the notice number, tax year, type of penalty, amount of the penalty, and deadline for responding. If the information provided by the IRS is incorrect, then follow the instructions for the notice to correct it.
2: Check Your Compliance History
Check IRS Transcripts (if available). Ensure all necessary returns are filed and tax is paid or in a tax installment agreement.
3: Choose the Correct Relief Basis
Select First Time Abate, reasonable cause, statutory exception, estimated tax penalty relief or appeal. Please avoid sending a blanket request. State the reason(s) for applying the specific relief.
4: Gather Evidence
Build a timeline. Match each of the key facts to a document. For instance, when someone was ill and therefore was not able to file the return, indicate the dates of their illness, of their treatment, and when they finally filed the return.
5: Contact the IRS or Submit a Written Request
A number is provided on the notice to make some requests by phone. If the IRS is not able to approve the relief on the phone, the IRS will need a written request or the use of Form 843. Make copies and proof of mailing.
6: Follow Up
The time it takes IRS to process is variable. Make the necessary payments and keep up to date during this time.
Using Form 843 for IRS Penalty Abatement
Some penalties, interest, additions to tax, fees and some taxes are subject to requests made on Form 843, Claim for Refund and Request for Abatement. IRS Form 843 would be necessary to ask for written penalty abatement, for a refund of penalties already paid and for a detailed exception under the statute or reasonable cause.
Provide taxpayers information, tax period, penalty type, explanation, supporting evidence, signature and proper mailing address. Some of the errors made include using the incorrect form, not specifying the penalty, not including any proof, sending to the wrong address, or requesting the IRS to delete the tax instead of the penalties.
What Counts as Reasonable Cause?
Good reasonable cause arguments have a clear linkage between the event and the failure. For instance, a patient who was admitted to the hospital while filing season was on and filed shortly after recovering from the illness will likely have a better case than someone who just forgot to file. A business with destroyed records due to a fire may qualify if they are able to demonstrate they had to keep records and they did start replacement immediately.
Examples of weak arguments are, “I forgot,” “I didn’t know the law,” “I was too busy,” or “I didn’t have the money.” Most often, lack of funds is not sufficient, though the reasons behind the lack of funds can be pertinent.
Increase your request by making a timeline, explaining cause/effect, adding objective evidence of compliance, providing details of past compliance, and outlining corrective action.
IRS Penalty Relief for Individuals
There are a variety of reasons why people may be needing assistance with late filing or payment of their Form 1040, or help with estimated tax penalties, or with notices like CP14, CP501, CP503 or CP504. IRS “clean compliance” and “reasonable cause” issues of penalty waivers for individuals typically depend on the type of penalty and the taxpayer’s ability to demonstrate either “clean compliance” or reasonable cause. Typically, IRS penalty waiver requirements for individuals are based on the type of penalty and ability to demonstrate clean compliance or reasonable cause (or, in some cases, a statutory exception).
If a person is seriously ill, lost his or her records in a disaster or if a family emergency occurs, a person should collect proof before contacting the IRS. The IRS Tax Refunds Issues can also overlap with penalty abatement and/or with refund claims that have been filed for penalties that have already been paid, if a refund is sought.
IRS Penalty Relief for Businesses
Possible payroll tax penalties, failure to deposit, partnership late filing, S corporation late filing, corporate penalties or information return penalties may apply to businesses. In the case of small businesses, they must present more detailed evidence to qualify for IRS penalty relief due to the IRS’ requirement to establish systems for filing, depositing and reporting.
Useful business paperwork encompasses payroll provider paperwork, EFT PS confirmations, bank statements, accounting documents, officer timetables, corrected records, internal procedure amendments and also evidence of conformity training.
First Time Abate vs. Reasonable Cause
First Time Abate is often not that difficult as it is based on IRS account history. The term reasonable cause is more flexible, but has higher requirements for facts and documents.
| Factor | First Time Abate | Reasonable Cause |
|---|---|---|
| Proof required | IRS history | Facts and documents |
| Applies to | Limited penalty types | More penalty types |
| Best for | Clean compliance history | Circumstances beyond control |
| Complexity | Lower | Higher |
| Approval basis | Administrative waiver | Facts and law |
If the facts are strong, some taxpayers might prefer to contest reasonable cause first and then move on to the administrative relief option, particularly when seeking administrative relief for another period. Care needs to be taken in this strategy.
What Happens to Interest if the IRS Removes the Penalty?
Interest is due on penalties with IRS. The related penalty interest will be reduced if a penalty is removed or lowered. Unless there is an agreement between the taxpayer and the tax authority, interest on unpaid tax will accrue. Future accruals can be minimized on the underlying liability by paying the tax or by establishing a payment plan.
What If the IRS Denies Your Request?
If not your request is denied, read the denial letter and appeal date. Ensure IRS used the appropriate relief basis. If key facts were omitted, you might be able to file an appeal with the IRS about the penalties or submit more information or ask for reconsideration.
A good appeal should be based on facts, documents and standards of law. Don’t give the same explanation without supporting it.
Common IRS Penalty Relief Mistakes to Avoid
Typical errors involve failing to respond, delay, calling when the penalty is not a First Time Abate type, requesting relief for an incorrect tax year, failure to file a missing return, not setting up a payment plan, sending no evidence, failure to file within the time limit provided or using a generic IRS penalty abatement letter.
Sample IRS Penalty Relief Request Structure
A safe written request should include:
- Taxpayer name and identification details
- IRS notice number
- Tax period
- Penalty type
- Relief requested
- Legal or factual basis
- Timeline of events
- Explanation of reasonable cause or eligibility
- Corrective actions
- Supporting document list
- Request for penalty and related interest abatement
- Signature and date
This framework can provide guidance and help you structure your IRS penalty abatement request letter without having to use a template.
How Long Does IRS Penalty Relief Take?
The timing will depend on the type of penalty, IRS workload, the communication method, and need for additional information (phone vs written). The IRS may approve a phone request quicker if they can do so on the spot. Requests and appeals written can take longer. Stay in the black, continue to monitor notices and remain compliant during the request.
Can You Get a Refund if You Already Paid the Penalty?
Yes, in some cases. If you have already paid the penalty and became eligible for penalty abatement, then you can request to be reimbursed for the penalty. Claim deadline is important and some claims may require the use of Form 843. Be sure to retain copies of all correspondence and proof of payment.
When Should You Hire a Tax Professional or Tax Attorney?
Seek professional assistance if the penalty is significant, includes withholding from the payroll, accuracy related issues, multiple year penalties, penalties which were already rejected, penalties related to missing returns, missing appeal, missing business deposit, missing international forms or penalties which may apply to a possible trust fund recovery penalty. A tax expert will be more versed in what constitutes the best relief basis, and will be able to assist in doing so and creating a more robust submission.
FAQs About IRS Penalty Relief Requirements
What are the basic IRS penalty relief requirements?
Filed returns, paid tax or payment plan, clean tax compliance, reasonable cause, statutory exception and supporting documentation are some basic requirements.
Does IRS penalty relief remove the tax I owe?
Typically no, penalty relief typically will either remove or reduce penalties, not the tax imbalance.
Can IRS penalties be removed?
There are some penalties that can be removed if the taxpayer is a “First Time Abate” taxpayer, a “reasonable cause” taxpayer, a “statutory exception” taxpayer, or otherwise qualifies.
What penalties qualify for First Time Abate?
Failure to file, failure to pay and failure to deposit penalties may be applied to by First Time Abate.
Does First Time Abate apply to estimated tax penalties?
The estimated tax penalties are generally subject to different rules and not the same penalties as the First Time Abate penalties are.
Can I request relief by phone?
The IRS may accept phone requests for some requests with the phone number provided on the IRS notice. Written support might be needed for more complicated requests.
When do I use Form 843?
Submit certain written requests for refunds and/or abatements on Form 843 if that is the proper form for the refund or abatement and penalty or issue.
Can businesses qualify?
Yes. Companies may be eligible, and may require more documentation, particularly regarding payroll and deposit fines.
Conclusion
The IRS’ penalty relief guidelines vary based on the type of penalty, filing and payment history, your explanation and your evidence. The most viable way to do this is to read the notice carefully, determine which of the relief options it offers is the right one, collect the evidence, and reply before the deadlines. No matter how you qualify for First Time Abate, reasonable cause or a statutory exception, a well-documented request will help you have the best chance of decreasing or eliminating IRS penalties.