What Are IRS Civil Penalties and How to Get Relief?

The Internal Revenue Service (IRS) uses civil penalties to encourage compliance with tax laws. These are monetary fines for actions like failing to file a return on time or not paying the correct tax amount. The purpose of these penalties is to deter noncompliance, not to generate revenue.

Civil penalties must be distinguished from criminal tax penalties. Civil actions involve only financial consequences, while criminal penalties are for intentional acts like tax fraud and can lead to imprisonment and larger fines. The standard of proof for criminal fraud is much higher, and most tax issues remain within the civil system.

Common Civil Penalties and Their Triggers

The Internal Revenue Code contains over 140 penalties, but most taxpayers only encounter a few common ones related to filing returns and paying taxes.

A frequent penalty is for failure to file. This applies when a taxpayer does not file their tax return by the due date, or the extended due date. An extension to file provides more time to submit the return but does not extend the time to pay the tax owed.

Another common assessment is the failure-to-pay penalty. This is triggered when a taxpayer does not pay the taxes on their return by the original due date. The penalty can accrue if the full amount is not paid by this date, even if an extension to file was granted.

Accuracy-related penalties are assessed when incorrect information on a return leads to an underpayment of tax. One trigger is negligence or a disregard of tax rules. Negligence is a failure to make a reasonable attempt to comply with tax laws, while disregard involves a careless or intentional ignoring of those rules.

Another trigger for the accuracy-related penalty is a substantial understatement of income tax. For individuals, an understatement is “substantial” if it is more than 10% of the tax that should have been on the return, or $5,000, whichever is greater.

The failure-to-deposit penalty is specific to employers. It is triggered when a business does not make its required employment tax deposits on time and in the correct amount. These deposits include federal income tax withholding and FICA taxes for Social Security and Medicare.

Calculating the Cost of Penalties

The financial impact of IRS penalties is determined by specific calculation methods, and costs escalate when interest is applied.

The failure-to-file penalty is calculated as 5% of the unpaid taxes for each month or part of a month that a tax return is late. This penalty is capped at a maximum of 25% of the unpaid tax bill. If a return is filed more than 60 days after the due date, the minimum penalty is the lesser of $510 or 100% of the tax owed.

The failure-to-pay penalty is 0.5% of the unpaid taxes for each month the taxes remain unpaid, also capped at 25% of the unpaid tax liability. When both penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty.

The accuracy-related penalty is a flat 20% of the tax underpayment resulting from negligence or a substantial understatement. For example, if an audit determines a taxpayer underpaid by $6,000 due to negligence, the penalty would be $1,200.

The application of interest also increases the total cost. The IRS charges interest on unpaid penalties from the assessment date until they are paid in full. This interest compounds daily, and the rate is determined quarterly, set at the federal short-term rate plus 3 percentage points.

Qualifying for Penalty Relief

The IRS allows for the reduction or removal of certain penalties, a process known as abatement. Qualification depends on a taxpayer’s compliance history and the reasons for failing to comply with tax laws.

One form of relief is the First-Time Penalty Abatement (FTA). To qualify, a taxpayer must have a history of good tax compliance, meaning no significant penalties in the prior three tax years. The taxpayer must also have filed all required returns and paid or arranged to pay any tax due. FTA can be used to abate the failure-to-file, failure-to-pay, and failure-to-deposit penalties.

The most common basis for relief is demonstrating “reasonable cause.” This requires a taxpayer to show they exercised ordinary business care and prudence but were still unable to file or pay on time. The IRS evaluates these claims case-by-case, considering all circumstances. For example, a death or serious illness of the taxpayer or an immediate family member can constitute reasonable cause.

Other examples of reasonable cause include the destruction of records in a disaster or the inability to obtain necessary records despite prudent efforts. A lack of funds or ignorance of the law are not considered valid reasons for reasonable cause on their own.

Statutory exceptions also provide for penalty relief. For instance, an exception may exist for the underpayment of estimated tax if a taxpayer is newly retired or disabled. Another exception can apply if a taxpayer received and reasonably relied on erroneous written advice from the IRS.

The Process for Requesting Abatement

After determining they may qualify for relief and gathering documents, a taxpayer must formally request abatement from the IRS. The method for making the request varies by case complexity.

For straightforward situations like a First-Time Penalty Abatement, a request can be made by calling the IRS at the number on the penalty notice. If the request is approved over the phone, the agent may process the abatement immediately.

For complex cases involving a reasonable cause argument, a written request is required using Form 843, Claim for Refund and Request for Abatement. The completed form, along with copies of all supporting documentation, should be mailed to the IRS service center indicated in the form’s instructions.

After a request is submitted, the IRS will review it and make a determination, which can take several months. The taxpayer will receive a letter confirming the abatement or explaining the denial. If denied, the letter will inform the taxpayer of their right to appeal the decision to the IRS Independent Office of Appeals.