How to Reduce IRS Penalties and Request Abatement

The Internal Revenue Service (IRS) assesses penalties for failing to file a tax return on time or to pay taxes owed by the deadline. The failure-to-file penalty can be 5% of the unpaid taxes for each month a return is late, capping at 25% of the unpaid tax. For returns filed more than 60 days after the due date, a minimum penalty applies, which is the lesser of a specific inflation-adjusted amount or 100% of the tax owed. The failure-to-pay penalty is 0.5% per month, but can also accrue up to a 25% maximum.

The IRS has established several programs that allow for the reduction or complete removal of these penalties. These administrative relief options provide a path for taxpayers to resolve their accounts and regain compliance. Understanding the requirements for each type of relief is the first step toward lowering or eliminating a penalty.

First-Time Penalty Abatement

The First-Time Abatement (FTA) policy is an administrative waiver the IRS may grant to taxpayers who have a clean compliance history. It is a form of relief for those who have made an isolated error. To be considered for this abatement, a taxpayer must meet three conditions. The first is filing compliance; all currently required tax returns must be filed or have a valid extension.

The second requirement is payment compliance. A taxpayer must have paid, or arranged to pay, any tax due, which can be done by paying the liability in full or entering into an installment agreement. The final condition is a clean penalty history for the three years preceding the tax year in which the penalty was assessed. For instance, if a penalty was applied to a 2024 tax return, the taxpayer must not have incurred similar penalties on their returns for 2021, 2022, and 2023.

This relief specifically applies to the failure-to-file, failure-to-pay, and failure-to-deposit penalties. The FTA analysis is based strictly on a taxpayer’s compliance record and does not require an explanation for the underlying failure. Once a taxpayer uses this one-time consideration, they must maintain a clean three-year compliance history to become eligible again. If the request is granted, the IRS will issue a letter confirming the removal of the penalty.

Reasonable Cause Relief

If a taxpayer is not eligible for First-Time Abatement, they may still have penalties removed by demonstrating “reasonable cause.” This standard requires a taxpayer to show they exercised ordinary business care and prudence but were unable to file or pay on time due to circumstances beyond their control. The IRS evaluates these requests on a case-by-case basis, and a history of previous compliance can strengthen a request.

Common situations that the IRS may consider as reasonable cause include the death or serious illness of the taxpayer or a member of their immediate family. Other valid reasons can include a fire, casualty, or natural disaster that destroyed the taxpayer’s home or records, or an unavoidable absence. Receiving incorrect advice from a competent tax advisor or the IRS can also serve as a basis for relief, provided the reliance on that advice was in good faith.

The success of a reasonable cause request depends on credible and specific documentation. For a claim based on a medical issue, this could include hospital records or a letter from a physician detailing the condition and its duration. In the case of a natural disaster, insurance reports or police records can substantiate the claim. The documentation must provide a clear link between the cited circumstance and the inability to meet the tax obligation.

How to Request Penalty Abatement

There are several methods to submit a request for penalty relief. The most direct approach is to call the IRS. The number for individuals is 1-800-829-1040, and for businesses, it is 1-800-829-4933. Before calling, have the relevant tax notice, your Social Security Number or Employer Identification Number, and all supporting information ready, as an IRS representative may be able to grant FTA relief over the phone if eligibility is clear.

A taxpayer can also send a written request to the service center address listed on the IRS notice. The letter must include a clear statement requesting either First-Time Abatement or relief based on reasonable cause. It should also contain:

• The taxpayer’s name and tax identification number
• The tax year and form number in question
• The notice number
• A detailed explanation and copies of all supporting documents if claiming reasonable cause

The most formal method is to file Form 843, Claim for Refund and Request for Abatement. This form provides a structured way to present the claim. The taxpayer must specify the tax period, the type of penalty, and provide a thorough explanation. Completed forms should be mailed to the IRS service center where the tax return was filed, unless a notice provides a different address.

Using an Offer in Compromise

An Offer in Compromise (OIC) presents a different path for addressing tax penalties, designed for situations where a taxpayer cannot afford to pay their full liability. An OIC is a formal agreement with the IRS to settle a tax debt, including penalties and interest, for a lower amount than what is owed. This option is based on the taxpayer’s ability to pay, not on whether the penalty was justified, and requires extensive financial disclosure.

The most common basis for an OIC is “Doubt as to Collectibility.” This applies when a taxpayer’s income and assets are insufficient to cover their entire tax debt. The IRS calculates a “reasonable collection potential,” which is the amount it believes it can realistically collect. The offer amount proposed by the taxpayer must meet or exceed this calculated figure.

To apply, a taxpayer must submit Form 656, Offer in Compromise, along with Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. This form requires a detailed accounting of all assets, income, and living expenses. The application requires a non-refundable fee of $210 and an initial payment, though these may be waived for low-income individuals. An accepted OIC requires strict compliance with all tax laws for five years, as failure to do so can void the agreement.