When it comes to taxes, even small mistakes can have costly consequences. The IRS assesses billions of dollars in penalties each year for things like late filings, missed payments, other penalties, or inaccuracies on tax forms such as the individual income tax return. In fact, in 2022 alone, the IRS assessed nearly $23.8 billion in additional taxes for late-filed returns and collected over $98.4 billion in unpaid assessments, highlighting the massive scale of unpaid assessments and related fees collected by the IRS. Penalties can also be assessed based on unreported or underreported income, further increasing the financial impact. For many individuals and businesses, these penalties can quickly snowball into an overwhelming financial burden on their tax bill. That said, the IRS offers something called penalty abatement, a form of tax penalty relief that can reduce or even eliminate certain penalties under certain circumstances.
Understanding IRS Penalties and Abatement
Many taxpayers are unaware that they may qualify for penalty abatement, as are some tax return preparers, who may overlook this potential relief. But abatement is a critical relief option for those facing issues with the IRS. It allows taxpayers to request forgiveness or a reduction of penalties and, in some cases, the associated interest. The process is especially valuable for those who have experienced circumstances that made it difficult to file or pay taxes on time.
Still, tax professionals such as enrolled agents and CPAs can play a vital role in helping clients identify eligibility for penalty abatement and navigate the application process. By leveraging their expertise, taxpayers can potentially reduce or eliminate IRS penalties. That’s why it’s important to understand your options.
The IRS has established guidelines, primarily outlined in the Internal Revenue Code, Internal Revenue Manual, policy statements, and the Penalty Handbook, that determine when a taxpayer may qualify for this kind of relief. Common reasons include demonstrating “reasonable cause,” meeting criteria for first-time abatement, qualifying for an administrative waiver, or pointing to an error made by the IRS itself. Penalty abatement can be especially helpful to taxpayers dealing with financial hardship, natural disasters, or life events that prevent them from meeting tax obligations on time.
It’s also important to note that abatement doesn’t happen automatically—you have to request it and provide evidence to support your case. To qualify, taxpayers must understand and follow the relevant laws, and eligibility often hinges on whether the taxpayer had control over the circumstances leading to the issue. For reasonable cause abatement, you must also establish reasonable cause by showing that you exercised “ordinary business care and prudence,” and that your failure to comply was due to reasonable cause beyond your control. Relief is generally granted when these criteria are met, making tax penalty abatement an important step towards resolving tax debt and avoiding further compounding interest or penalties.
How the IRS Views Penalty Relief
The IRS doesn’t hand out penalty relief lightly. To even be considered for abatement, taxpayers are expected to have exercised care and prudence, as well as have acted in good faith. While reasonable cause can justify relief, penalties assessed due to willful neglect, meaning conscious or reckless disregard of tax obligations, are not eligible for relief.
For example, a taxpayer who became seriously ill during tax season and couldn’t file on time might be eligible under reasonable cause relief. Similarly, if this is the first time a taxpayer has been penalized, and they have an otherwise clean record of compliance, they may qualify for the first-time abatement. There are also situations in which the IRS acknowledges that it made an error itself in assessing penalties, and in such cases, a correction may result in a penalty being lifted altogether. The IRS will consider the taxpayer’s specific circumstances and efforts when reviewing requests for relief, and an authorized representative can assist in reviewing IRS notices, requesting penalty relief, and ensuring proper communication with the IRS throughout the whole process.
The Process of Requesting Penalty Abatement
There are several ways to request penalty abatement (and again, depending on the type of penalty and your circumstances). One of the most common methods is by submitting Form 843, Claim for Refund and Request for Abatement. This form allows taxpayers to formally state their case, attach supporting documentation, and make written or oral requests for relief. Alternatively, many individuals find success by calling the IRS directly, especially in first-time cases where the facts are straightforward. In some instances, an in-person visit, or written correspondence may be required.
Whether you’re submitting a form or speaking with an agent, clear and full documentation is necessary. The IRS will want to see all evidence that supports your claim such as hospitalization records, natural disaster declarations, or proof that taxes were paid or filed as soon as reasonably possible. As always, maintaining accurate taxpayer files is essential (something we at Walters often repeat), as the IRS will ultimately review these files to assess their penalties and process relief requests.
Claim for Refund and Penalty Relief
If you believe you have been unfairly assessed a tax penalty or have overpaid your taxes, you can formally request relief by submitting the above-mentioned Form 843. When completing it, fully provide accurate information about your liability, including the specific tax period, the type of tax involved, and the dollar amount in question. You’ll also need to clearly explain the reason for your penalty abatement request, detailing the circumstances that led to the penalty and why you believe relief is warranted.
Once your abatement request is submitted, the IRS will review the claim and determine if you qualify. If approved, you may receive a refund or have penalties and interest removed from your account. If the IRS denies your request, you still have the right to appeal the decision, giving you another chance to present your case and seek the relief you deserve.
Understanding the Main Types of Abatement Grounds
Getting more granular, the most granted form of penalty relief is what’s called reasonable cause abatement. This requires showing that something unexpected and unavoidable prevented you from complying. Life events like serious illness, death in the family, undue hardship, or unavoidable business disruptions may all qualify, again, provided you can demonstrate that you acted responsibly before and after the event.
The first-time abatement option on the other hand is more procedural and doesn’t require hardship. Instead, it rewards a good track record. If you’ve filed all required returns and paid or arranged to pay any taxes due, and haven’t previously been assessed penalties such as the failure to file penalty, failure to pay penalty, late filing penalty, or failure to deposit penalty in the last three tax years, you may qualify for this one-time courtesy. Maintaining a clean compliance history over specific tax years is key. The IRS uses this program to encourage voluntary compliance.
In rare cases, the IRS may grant administrative waivers when broader policy shifts, systemic errors, or natural disasters affect a large number of taxpayers. Penalties related to gift tax may also be eligible for abatement under certain circumstances. And in cases of IRS error, such as a miscalculation or processing mistake, penalty abatement is typically granted once the issue is brought to the agency’s attention.
And, as always, making timely estimated tax payments (for relevant taxpayers) is another important aspect of compliance that can help you avoid penalties.
Real-World Scenario: A Business Owner’s Relief
Take the case of an owner of a small physical therapy business who missed a payroll tax filing deadline due to a ransomware attack that locked her accounting systems for close to two weeks. Even after she restored the files and made the payment, she received a significant penalty notice from the IRS. With the help of an outside accounting firm, she filed Form 843, included documentation on the cybersecurity incident, and described the steps she took to restore operations. The IRS reviewed the case and agreed that she had shown reasonable cause, resulting in a full abatement of the penalties.
Appealing an IRS Denial
If, unfortunately, the IRS indeed denies your penalty abatement request, you’re not out of options. Taxpayers do have the right to appeal decisions and present additional information that may support their claim for relief. To begin the appeals process, you must submit a written request to the IRS, clearly outlining why you disagree with the denial and including any new or previously unsubmitted documentation that supports your position.
During the appeal, you may also request a conference with an IRS appeals officer. This can provide an opportunity to discuss your case in greater detail, clarify any misunderstandings, and present additional evidence of your case. The appeals officer will review all the facts and make an independent determination based on the information provided.
If the outcome of the appeal is still not in your favor, you may have the option to take your case to tax court for further review. Navigating the process can be complex, so it may be helpful to work with a tax professional who can help you prepare your case. Regardless, it’s always vital to understand your rights and to know the steps involved in appealing any denial.
Avoiding Future IRS Penalties
The best way to avoid needing abatement in the first place is to stay ahead of your tax responsibilities. This means filing and paying on time, even if you can’t afford the full amount owed, as partial payments may still reduce penalties. If you anticipate delays, requesting an extension before the deadline will also save you trouble down the road. Keep accurate records and use digital reminders.
The IRS website also provides tools, forms, and publications to help you stay compliant. For those with more complex situations, a tax professional can guide you through planning strategies. Now, while it is entirely possible to file for IRS penalty abatement on your own, the nuances of the rules can make it worthwhile to seek expert support. A tax professional can assess whether you’re eligible, identify the strongest grounds for relief, and prepare your request in a way that improves the likelihood of success.
So, be proactive, stay informed, and reach out for help when needed. And if you think you might qualify for abatement, don’t wait. The sooner you act, the more options you may have to find relief. And we at Walters are quite experienced in these complex situations and are more than happy to assist our clients navigating them.
