What Is a Tax Negligence Penalty and How Do You Fix It?

A notice from the IRS mentioning a tax negligence penalty means a taxpayer has failed to make a reasonable attempt to comply with federal tax laws, resulting in an underpayment. This issue is more serious than a simple mistake but less severe than intentional tax fraud. The situation is often manageable, but addressing it requires understanding what the penalty entails, what defenses the IRS recognizes, and the procedures for requesting relief.

The Accuracy-Related Penalty for Negligence

The Internal Revenue Service can impose an accuracy-related penalty if an underpayment of tax is due to specific taxpayer conduct. Under Internal Revenue Code Section 6662, this penalty is 20% of the underpayment portion attributable to negligence or disregard of the rules. While often discussed together, “negligence” and “disregard” have distinct meanings. Negligence is any failure to make a reasonable attempt to comply with the tax code, while disregard involves careless, reckless, or intentional ignoring of tax rules.

The penalty applies to a broad range of actions. Common examples of conduct classified as negligent include failing to report income that was reported to the IRS on an information return, like a Form 1099 or W-2. Another frequent trigger is the failure to maintain adequate books and records to substantiate deductions or credits. Taking a position on a tax return that lacks a reasonable basis can also lead to the penalty.

It is important to distinguish this penalty from other issues. A simple mathematical error on a return will be corrected by the IRS and result in a bill for the additional tax plus interest, but not the 20% accuracy-related penalty. In contrast, tax fraud involves a willful attempt to evade tax and carries much more severe consequences, including a civil fraud penalty of 75% under IRC Section 6663 and potential criminal charges.

The 20% penalty is not “stackable,” meaning that even if an underpayment is due to both negligence and another trigger like a substantial understatement of income tax, the penalty remains 20%. The penalty is calculated only on the specific part of the tax underpayment that resulted from the negligent action.

Establishing Reasonable Cause

The primary exception to the accuracy-related penalty is the “reasonable cause” defense. Under Internal Revenue Code Section 6664, the penalty will not be imposed on any portion of an underpayment if the taxpayer can show there was a reasonable cause and that they acted in good faith. This standard requires demonstrating that you exercised ordinary business care and prudence in your tax affairs but were still unable to comply. The determination is made on a case-by-case basis.

The IRS considers several factors when evaluating a reasonable cause claim, including:

• The taxpayer’s experience, knowledge, and education.
• The taxpayer’s efforts to determine the correct tax liability.
• Significant life events, such as the death or serious illness of the taxpayer or an immediate family member close to the filing deadline.
• The inability to obtain necessary records despite reasonable efforts, or the destruction of records due to a fire, flood, or other casualty.

Reliance on the advice of a competent tax professional is a common basis for this defense. To succeed with this argument, a taxpayer must prove the advisor was a competent professional, the taxpayer provided the advisor with all necessary and accurate information, and the taxpayer actually relied on the advisor’s judgment in good faith. Simply hiring a professional is not enough, as you remain responsible for your return’s accuracy.

Gathering the right documentation is necessary to build a successful reasonable cause case. If illness is the reason, hospital records or a doctor’s letter are needed. If you relied on professional advice that turned out to be erroneous, you would need correspondence from the advisor and a copy of the information you provided. For a claim based on a natural disaster, documentation like insurance claims can help substantiate the event.

Requesting Penalty Abatement

Once you have a case for reasonable cause and have gathered supporting evidence, you must formally request that the IRS remove, or abate, the penalty. The primary way to do this is with IRS Form 843, Claim for Refund and Request for Abatement. This form is used to ask for the abatement of certain penalties and interest that have been assessed.

When completing Form 843, you will need to enter the tax period, the specific penalty amount you are asking to have abated, and the type of tax involved. A separate Form 843 must be filed for each tax period. The most important part is Line 7, the explanation section, where you must clearly lay out your argument for reasonable cause, referencing your evidence.

Your written explanation should be a factual narrative detailing the circumstances that led to the tax underpayment and should connect directly to the evidence you submit. All supporting documents, such as medical records or letters, should be attached to the completed Form 843.

After completing and signing the form, you must mail it to the IRS service center indicated in the form’s instructions. The IRS will review the request, which can take several months. The potential outcomes are an acceptance of your request and abatement of the penalty, a denial of the request, or a letter from the IRS asking for more information.

Taxpayer Diligence and Record-Keeping

The most direct way to demonstrate diligence and avoid negligence penalties is through maintaining complete and accurate records. Good record-keeping provides objective proof that you made a reasonable attempt to report income and expenses correctly.

Records should be contemporaneous, meaning they are created at the time a transaction occurs, not reconstructed months or years later. This could include detailed mileage logs for business driving, organized receipts for business expenses, and clear documentation for any deductions claimed. In an audit, this documentation is the primary defense against a negligence assertion.