What Is an IRS Civil Penalty and How Do You Handle It?

An IRS civil penalty is a monetary charge the Internal Revenue Service assesses when a taxpayer fails to comply with federal tax laws. These penalties are not criminal in nature, meaning they do not involve prosecution or jail time, but are instead financial consequences designed to encourage voluntary adherence to tax regulations. These penalties are common and can significantly increase the amount of money a person owes.

Common Types of Civil Penalties

One of the most frequent penalties is for failure to file. This penalty applies when you do not file your tax return by the due date, including any approved extensions. The calculation is 5% of the unpaid taxes for each month or part of a month that the return is late. This penalty is capped at a maximum of 25% of your unpaid tax bill. If a return is over 60 days late, a minimum penalty applies, which is the lesser of a specific inflation-adjusted amount or 100% of the tax owed.

A separate penalty exists for failure to pay. This is assessed when you don’t pay the taxes reported on your return by the deadline. The penalty is 0.5% of the unpaid taxes for each month or part of a month they remain unpaid, also capped at 25%.

If both the failure-to-file and failure-to-pay penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty for that month. This results in a combined maximum of 5% per month.

An accuracy-related penalty of 20% may be applied if you underpay your tax due to negligence or a substantial understatement of your tax liability. Negligence includes failing to make a reasonable attempt to comply with tax laws, while a “substantial understatement” for an individual means understating your tax liability by more than 10% of the correct tax or $5,000, whichever is greater. Other penalties include those for underpaying estimated taxes or for payments made with a dishonored check.

The IRS Penalty Notice

When the IRS assesses a penalty, it communicates this through an official letter. The most common notice for a balance due, which includes penalties, is the CP14. This notice is a bill for a specific compliance failure, not an audit notification.

When you receive a notice, you should carefully review it for the notice number, the specific tax year in question, and a detailed breakdown of the tax, penalties, and interest owed.

The notice will also provide a response deadline, which is often 21 days if you owe less than $100,000. Ignoring the notice can lead to more severe collection actions, such as a federal tax lien or a levy on your wages or bank account. Keep a copy of the notice, as it contains information needed for any future correspondence or appeals.

Grounds for Penalty Abatement

Penalty abatement is the process of asking the IRS to remove or reduce an assessed penalty. The IRS has established specific grounds under which a taxpayer may qualify for relief.

A common path to relief is the First-Time Penalty Abatement (FTA) program. This administrative waiver is available to taxpayers who have a clean compliance history. To qualify, you must have filed all required returns for the past three years and not have had any other penalties assessed during that period. This relief applies to the failure-to-file, failure-to-pay, and failure-to-deposit penalties.

Another basis for abatement is demonstrating “reasonable cause.” This applies if you can show that you exercised ordinary business care and prudence but were still unable to meet your tax obligations. Valid reasons often include events beyond your control, such as a fire, natural disaster, or the death or serious illness of the taxpayer or an immediate family member.

To support a reasonable cause claim, you must provide evidence that corroborates your explanation. Examples of effective documentation include hospital or medical records to prove illness, a death certificate, or official reports from police or fire departments. Letters from professionals like doctors or attorneys can also help substantiate your claim.

How to Formally Request Abatement

While some simple First-Time Abatement requests can be handled over the phone, a written request creates a formal record. The primary method for a written request is filing Form 843, Claim for Refund and Request for Abatement.

When completing the form, provide your personal information and specify the tax period and penalty amount. In Line 7, you will provide a detailed explanation. Here, you should clearly state whether you are requesting First-Time Abatement or explain your reasonable cause argument, referencing the attached documents.

You must file a separate Form 843 for each tax period or type of penalty. The completed form and all supporting documentation should be mailed to the IRS service center address listed on the penalty notice you received. If you did not receive a notice, the instructions for Form 843 provide the correct mailing address.

After submitting your request, the IRS will review your case, which can take several months. The agency will then send a letter notifying you of its decision. The potential outcomes are that the penalty is fully abated, the request is denied, or the IRS may ask for additional information.