Penalties Are Negotiable
Most taxpayers do not know that IRS penalties can be abated. The IRS assesses penalties automatically through its computer systems, but those same penalties can be removed if you have a valid basis for requesting relief. The key is knowing which type of relief applies to your situation and how to request it properly.
First Time Abatement
If you have a clean compliance history — meaning you filed on time and paid on time for the three years prior to the year in question — you may qualify for First Time Abatement (FTA). This is an administrative waiver the IRS offers to taxpayers who have a good track record but slipped up once. It can eliminate failure-to-file and failure-to-pay penalties for one tax period.
FTA is easy to request. You can call the IRS and ask for it verbally, or you can submit a written request. You do not need to provide a reason for the late filing or payment. The IRS simply checks your compliance history and, if you qualify, removes the penalty.
Reasonable Cause
If you do not qualify for FTA, you can request penalty abatement based on reasonable cause. This requires showing that you exercised ordinary business care and prudence but were still unable to comply due to circumstances beyond your control. The IRS Internal Revenue Manual lists specific factors that constitute reasonable cause, including serious illness, death of a family member, natural disaster, fire, and reliance on professional advice.
Reasonable cause requests should be in writing and include supporting documentation. A letter from your doctor, a death certificate, an insurance claim for a disaster, or a letter from your accountant explaining the error all strengthen your case.
Statutory Exceptions
Certain penalties have statutory exceptions built into the tax code. For example, the estimated tax penalty can be reduced or eliminated using Form 2210 if you had uneven income throughout the year. The failure-to-file penalty does not apply if you have a valid extension and no tax due.
When Penalties Cannot Be Abated
Some penalties are very difficult to remove. The fraud penalty under Section 6663 requires the IRS to prove fraud by clear and convincing evidence, but once assessed, it is nearly impossible to abate. Penalties related to frivolous returns under Section 6702 are also rarely abated.
The IRS assesses billions of dollars in penalties every year. A significant portion of those penalties are abatable. If you do not ask, you do not get relief.