How IRS penalties add up
Most IRS balances have three parts: the tax, the penalties, and interest on both. Penalties grow quickly:
- Failure to file: 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. If a return is more than 60 days late, a minimum penalty applies.
- Failure to pay: 0.5% of the unpaid tax per month, up to 25%. It drops to 0.25% per month while an approved installment agreement is in effect, if the return was filed on time.
- Both at once: when both apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount, so the combined rate is 5% a month until the filing penalty maxes out.
- Failure to deposit (businesses): 2% to 15% of a late or missed payroll tax deposit, depending on how late it is.
- Accuracy-related penalties: generally 20% of an underpayment due to negligence or a substantial understatement.
Interest is charged on penalties too. On a return filed and paid very late, penalties and interest together can add 40% or more on top of the original tax.
First-time abatement (FTA)
First-time abatement is an IRS administrative waiver, and it's underused. If you qualify, the IRS will generally remove the penalty without needing to hear a reason. You typically qualify if:
- You have a clean history. No significant penalties in the three tax years before the year you're asking about. (An estimated tax penalty generally doesn't disqualify you.)
- You've filed. All currently required returns are filed, or you have a valid extension.
- You've paid, or arranged to pay. The tax is paid, or you have an installment agreement and are current on it.
FTA covers failure-to-file, failure-to-pay, and failure-to-deposit penalties. It doesn't cover accuracy-related penalties or the estimated tax penalty. It's generally applied to one tax year, typically the earliest year with a penalty, which is why the order of requests matters when several years are involved.
Why the strategy matters: if you have penalties in several years, using FTA on the wrong year can disqualify a later request. We review your full transcript history before asking for anything, and combine FTA with reasonable cause where the facts support it.
Reasonable cause
If you don't qualify for FTA, or you need relief for more than one year, the next route is reasonable cause. You have to show that you exercised ordinary business care and prudence and still couldn't comply. Circumstances the IRS commonly accepts include:
- A serious illness, injury, or hospitalization, yours or an immediate family member's
- The death of a close family member
- A natural disaster, fire, or other casualty, including federally declared disaster areas
- Being unable to get records despite reasonable efforts
- Relying on incorrect written advice from the IRS, or in some cases from a tax professional
The IRS looks at the timeline closely. The circumstances have to explain the whole period of noncompliance, and you're expected to have filed and paid as soon as you reasonably could afterward. "I didn't have the money" generally isn't enough on its own, though the reason you didn't have it may be.
Reasonable cause requests succeed or fail on documentation: hospital records, death certificates, insurance claims, correspondence. We build the request as a clear timeline backed by records.
Paying penalties you might not owe? Let's look at your transcripts.
Get a Free ReviewHow penalty relief is requested
Depending on the penalty and the amount, relief can be requested by phone, in writing, or on Form 843 (Claim for Refund and Request for Abatement). FTA for smaller amounts can sometimes be granted over the phone by the IRS when a representative calls. Larger or more complex requests go in writing.
If the IRS denies the request, you can appeal to the IRS Independent Office of Appeals. Many reasonable cause requests that are denied at the first level are later granted on appeal, especially when the original request was thin on documentation.
Penalties you've already paid
You can request abatement of penalties you've already paid and get a refund, generally within three years from when the return was filed or two years from when the penalty was paid, whichever is later. If you paid a large penalty in the last couple of years, it's worth a look.
How penalty abatement fits into a bigger resolution
Penalty relief is rarely the whole answer, but it often makes the rest of the answer better:
- It can bring a balance under the $50,000 streamlined limit for a payment plan, avoiding a full financial disclosure.
- It can bring a balance under $25,000, which can make lien withdrawal possible on a direct debit plan.
- It lowers the monthly payment and the total cost over the life of a plan.
- For businesses with payroll tax debt, removing failure-to-deposit penalties can be a meaningful reduction.
States have their own penalty relief rules, and most accept reasonable cause requests. See state tax debt.