Penalty Abatement

The four most common IRS penalties and how they are calculated

Understanding how each penalty is calculated is essential to knowing what relief is available and how much is at stake.

The failure-to-file penalty (IRC Section 6651(a)(1)) is 5% of the unpaid tax for each month or partial month the return is late, up to a maximum of 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $510 (for returns due in 2025) or 100% of the tax due. This penalty is assessed even if you owe nothing, though it is calculated on the unpaid balance, so a $0 balance means a $0 penalty. Filing for an extension avoids this penalty entirely as long as you file by the extended deadline.

The failure-to-pay penalty (IRC Section 6651(a)(2)) is 0.5% of the unpaid tax for each month or partial month the tax remains unpaid, up to a maximum of 25%. If both failure-to-file and failure-to-pay penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount, so the combined rate is 5% per month (not 5.5%). Entering an installment agreement reduces the failure-to-pay rate to 0.25% per month.

The accuracy-related penalty (IRC Section 6662) is 20% of the portion of the underpayment attributable to negligence, disregard of rules, a substantial understatement of income tax (the greater of 10% of the tax due or $5,000), or a substantial valuation misstatement. For gross valuation misstatements, the penalty doubles to 40%. This penalty can be avoided by demonstrating reasonable cause and good faith under Section 6664(c).

The estimated tax penalty (IRC Section 6654) applies if you did not pay enough estimated tax during the year. It is calculated on a quarter-by-quarter basis using the federal short-term rate plus 3 percentage points. Unlike other penalties, the estimated tax penalty is technically interest and is assessed automatically. Waiver is available if the underpayment was due to casualty, disaster, or other unusual circumstances, or if you retired or became disabled during the year.

Failure to file costs 5%/month (max 25%), failure to pay costs 0.5%/month (max 25%), accuracy penalties are 20% of the underpayment, and estimated tax penalties are calculated quarterly at the federal short-term rate plus 3%. (IRC Section 6651(a)(1)-(2); IRC Section 6662; IRC Section 6654; IRC Section 6664(c))

First Time Abatement: the easiest path to penalty relief

First Time Abatement (FTA) is an administrative waiver that the IRS grants under IRM 20.1.1.3.6.1. It is not a law; it is an internal IRS policy. To qualify, you must meet three criteria: (1) you have not been assessed any penalties on the same type of return for the prior three tax years, (2) you have filed all currently required returns or filed a valid extension, and (3) you have paid, or arranged to pay, any tax due.

FTA applies to the failure-to-file penalty, the failure-to-pay penalty, and the failure-to-deposit penalty (for employment taxes). It does not apply to accuracy-related penalties, fraud penalties, or estimated tax penalties. FTA removes the penalty for a single tax period. If you have penalties for multiple years, FTA applies only to the earliest qualifying year.

You can request FTA by calling the IRS at the number on your notice. You do not need to file a written request, though you can submit one using Form 843 (Claim for Refund and Request for Abatement). When you call, tell the representative that you are requesting First Time Abatement under IRM 20.1.1.3.6.1, that you have a clean penalty history for the past three years, and that all returns are filed and taxes are paid or on an installment agreement. The representative can verify your penalty history in the system and process the abatement during the call.

Important strategic note: if both FTA and reasonable cause are available, request FTA first. FTA preserves your reasonable cause argument for future years. If you use reasonable cause first and then incur penalties in a later year, you may not qualify for FTA because reasonable cause abatement is recorded differently in the IRS system than FTA.

First Time Abatement removes failure-to-file or failure-to-pay penalties if you have a clean 3-year history, all returns are filed, and taxes are paid or in a payment plan. You can request it by phone. (IRM 20.1.1.3.6.1 (First Time Abate); IRM 20.1.1.3.3.2.1 (FTA Criteria))

Reasonable cause: when circumstances prevented compliance

If you do not qualify for FTA, reasonable cause abatement under IRC Section 6651(a) (for filing and payment penalties) or IRC Section 6664(c) (for accuracy penalties) is your next option. The standard is whether you exercised ordinary business care and prudence but were nevertheless unable to comply. The IRS evaluates reasonable cause on a case-by-case basis, considering the totality of your circumstances.

IRM 20.1.1.3.2 lists the factors the IRS considers: death, serious illness, or unavoidable absence of the taxpayer or an immediate family member; fire, casualty, natural disaster, or other disturbance; inability to obtain records; reliance on advice from a tax professional (the advice must be from a competent professional to whom you provided complete and accurate information); ignorance of the law (generally not sufficient on its own, but can be a factor combined with other circumstances); and other factors demonstrating ordinary business care.

Your reasonable cause request must be specific, documented, and connect the circumstance to the specific tax obligation you missed. A letter that says "I was going through a difficult time" will not succeed. A letter that says "I was hospitalised from March 2 to April 28, 2024, and was physically unable to file my return or contact a tax professional during this period" and includes hospital records will succeed. Attach supporting documentation for every claim: medical records, insurance claims, fire department reports, death certificates, correspondence with your tax professional, or any other relevant evidence.

For accuracy-related penalties, demonstrating reasonable cause requires showing that you had a reasonable basis for the position taken on your return. Reliance on a qualified tax professional's advice is the strongest defence, but you must show that you provided the professional with complete and accurate information and that the advice was reasonable given the complexity of the issue.

You can have penalties removed if you can show that you exercised ordinary business care but were still unable to comply due to circumstances beyond your control. (IRC Section 6651(a) (reasonable cause for filing/payment); IRC Section 6664(c) (reasonable cause for accuracy); IRM 20.1.1.3.2 (Reasonable Cause criteria))

"I am calling to request First Time Abatement for the [failure-to-file / failure-to-pay] penalty on my [year] return under IRM 20.1.1.3.6.1.

  My name is [full legal name], my Social Security number is [XXX-XX-XXXX], and the tax year is [year].

  I meet the three criteria for First Time Abatement:
  1. I have not been assessed any penalties for the same type of return in the three prior tax years ([year-3], [year-2], [year-1]).
  2. All of my required returns are currently filed.
  3. I have paid the tax due [or I am on an approved installment agreement].

  Can you verify my penalty history and process the First Time Abatement?"

  [If the representative says you do not qualify, ask them to confirm which specific year has a penalty that disqualifies you. If they are unfamiliar with FTA, reference IRM 20.1.1.3.6.1 and ask to speak with a supervisor.]

Internal Revenue Service
  [Service Center Address from Your Notice]

  Re: Request for Penalty Abatement — Reasonable Cause
  Taxpayer: [Your Full Legal Name]
  SSN: [XXX-XX-XXXX]
  Tax Year: [Year]
  Notice Number: [CP Number or Letter Number]
  Penalty Amount: $[Amount]

  Dear Penalty Abatement Coordinator:

  I am writing to request abatement of the [failure-to-file / failure-to-pay / accuracy-related] penalty assessed on my [year] federal income tax return. I believe I have reasonable cause for this penalty under IRC Section 6651(a) [or 6664(c)] and IRM 20.1.1.3.2.

  CIRCUMSTANCES:

  [Describe your specific circumstances in detail. Be factual, specific, and chronological. For example:]

  On [date], I [was hospitalised / experienced a house fire / lost my spouse / was in a car accident]. This event occurred during the period when I would normally have prepared and filed my tax return. Specifically:

  - [Date]: [What happened]
  - [Date range]: [How it prevented you from filing/paying]
  - [Date]: [When you were able to resume normal activities]
  - [Date]: [When you filed your return or paid your tax]

  I exercised ordinary business care in my tax affairs. Prior to this event, I [had filed all returns on time / had never owed a balance / had retained a tax professional]. As soon as I was able, I [filed the return / made the payment / contacted a tax professional].

  SUPPORTING DOCUMENTATION:

  I have enclosed the following documents supporting my request:
  1. [Medical records / hospital discharge summary]
  2. [Fire department report / insurance claim]
  3. [Death certificate]
  4. [Other relevant documentation]

  I respectfully request that the penalty of $[amount] be abated in full. If you require additional information, please contact me at [phone number].

  Sincerely,

  [Your Signature]
  [Your Printed Name]
  [Your Address]
  [Date]

  Enclosures: [List all attachments]

Internal Revenue Service
  [Service Center Address from Your Notice]

  Re: Request for Waiver of Estimated Tax Penalty
  Taxpayer: [Your Full Legal Name]
  SSN: [XXX-XX-XXXX]
  Tax Year: [Year]
  Penalty Amount: $[Amount]

  Dear Estimated Tax Penalty Unit:

  I am writing to request a waiver of the estimated tax penalty assessed on my [year] federal income tax return under IRC Section 6654(e)(3).

  [Choose the applicable ground:]

  OPTION A — Casualty, Disaster, or Unusual Circumstance:
  The underpayment of estimated tax was caused by [describe the casualty, disaster, or unusual circumstance]. Imposing the penalty would be against equity and good conscience because [explain why]. I was unable to make timely estimated tax payments because [specific explanation].

  OPTION B — Retirement or Disability:
  I [retired after reaching age 62 / became disabled] during the [year] tax year. My retirement/disability date was [date]. The underpayment of estimated tax was due to reasonable cause and not wilful neglect, as my income situation changed significantly and unexpectedly when I [retired/became disabled].

  I have enclosed [Form 2210 with the waiver box checked on line _ / supporting documentation including medical records or retirement documentation].

  I respectfully request that the estimated tax penalty of $[amount] be waived in full.

  Sincerely,

  [Your Signature]
  [Your Printed Name]
  [Your Address]
  [Date]

  Enclosures: [List all attachments]