What Is a Penalty Abatement?

Penalty abatement definition

In simple terms, penalty abatement is when the IRS agrees to “forgive” or cancel the extra fines it added to your tax bill. If you missed a deadline or made a mistake on your taxes, you might be charged expensive penalties, but an abatement gives you a chance to have those fees wiped away.

Think of it like getting a late fee removed from a library book or a credit card: You still have to pay the original bill, but the “punishment” fees are removed.

How a penalty abatement works

The IRS uses the penalty abatement program to incentivize people to comply with tax laws and regulations while acknowledging that unexpected life events can sometimes prevent a taxpayer from meeting deadlines, according to Dennis Shirshikov, an educational leader at Fullmind who has a background in finance and investing.

“In short, through this program, the IRS hopes to grant temporary tax relief and bring taxpayers back into compliance without placing undue financial strain,” Shirshikov said. Examples of reasonable causes where abatement might be considered include unforeseen hardships such as:

• Loss of a job
• Death of a spouse
• Natural disaster

Most common IRS tax penalties

The IRS has many penalties at its disposal that it can use to ensure compliance. Below, we’ve listed some of the most common tax penalties you may be subject to:

• Information return penalty: This penalty can occur if you don’t file an information return or payee statement by the due date.
• Accuracy-related penalty: This penalty can occur if you don’t correctly claim all your income on your return, or if you claim deductions or credits that you don’t qualify for. This penalty equates to 20% of the total amount of underpaid tax.
• Failure to deposit penalty: This can be assessed for business owners who don’t pay employment taxes accurately or on time. It’s assessed on a rolling rate schedule based on the number of days late the correct deposit is made.
• Underpayment of estimated tax by individuals: This penalty applies to self-employed individuals who fail to pay estimated tax accurately or on time. It’s assessed at 5% of the amount of the unpaid tax.
• Failure to file penalty: You’ll be subject to this penalty, which is 5% of the tax due for each month, if you don’t file your tax return by the IRS deadline of April 15.
• Failure to pay penalty: You’ll be hit with this penalty if you fail to pay the tax you owe by the due date. The failure to pay penalty is 0.5% of the amount of unpaid taxes that remain each month or part of a month, not to exceed 25% of your unpaid taxes.

Important note

Even if you set up an approved payment plan with the IRS, you’ll still be subject to the failure-to-pay penalty (at a reduced rate of 0.25%) until the total amount is paid.

» MORE: What to do if you receive a letter from the IRS

Who is eligible for a penalty abatement?

Whether or not you’re eligible for penalty abatement comes down to your history of filing and paying taxes. According to the IRS, you have a better chance of qualifying for penalty abatement if you have:

• No penalties assessed for the past three tax years
• Never been late filing a tax return or an extension request
• Paid up on any taxes due

In other words, according to Shirshikov, the IRS will look at your overall compliance history, whether a reasonable cause exists for the infraction and whether the issue is isolated. Taxpayers in good standing or those experiencing unique, extraordinary circumstances may qualify.

Types of penalty abatement

To qualify for relief, your situation must fit into one of the specific categories recognized by the IRS. Each type has its own set of rules regarding who can apply and what documentation is required to prove you deserve a break on your fees.

First Time Abatement (FTA) program

The FTA is an administrative waiver designed for taxpayers who have a clean record but made a one-time mistake. To be eligible, you must have filed all currently required returns and have no penalties assessed against you for the past three tax years. It is the easiest type of relief to get because you don't need to provide a complex excuse, just a history of following the rules.

Reasonable cause abatement

This type of relief is for people who faced significant life disruptions that prevented them from filing or paying on time. Qualifying circumstances typically include natural disasters, serious illness or the death of an immediate family member.

To be deemed eligible, you’ll have to prove reasonable cause to the IRS. This places the burden of proof on you to show that the noncompliance occurred because of factors outside of your control, says Shirshikov, and that you acted with reasonable diligence.

An example of this would be submitting medical documentation or disaster reports to highlight the difficulty of your circumstances to the IRS.

Statutory and administrative waivers

These waivers are granted when the error wasn't entirely your fault or when new legislation changes the rules. For example, if you followed incorrect written advice from an IRS agent, you can request a statutory waiver.

The IRS may also issue administrative waivers during widespread events, such as providing automatic relief for everyone impacted by a specific hurricane or pandemic-related delay.

Steps to request a penalty abatement

To request a penalty abatement, you must contact the IRS by submitting an official request along with evidence to back up your claims. Follow these steps to navigate the process:

1. Determine your eligibility: Before filing, identify which relief category fits your situation. You may qualify based on a first-time mistake, a “reasonable cause” (like a medical emergency) or an IRS error.
2. Complete the correct paperwork: According to Shirshikov, you’ll likely need to request abatement in writing. You can do this by filing a formal letter with the IRS, typically via Form 843 (Claim for Refund and Request for Abatement).
3. Explain your situation: In your request, clarify the circumstances that caused you to incur a penalty. According to Shirshikov, this involves “explaining the reason(s) that led to the inability to comply.”
4. Gather supporting documentation: Aside from Form 843, provide documentation that directly supports your case. This could include:
   • Medical records or hospital statements
   • Proof of natural disasters (like insurance claims or news reports)
   • A history of past communications with the IRS or written advice you received
5. Submit and wait for a decision: Send your completed form and evidence to the address listed on your IRS notice. Once submitted, it typically takes a few weeks to several months for the IRS to review your file and make a decision.

What happens if my penalty abatement request is denied?

If your request for penalty abatement is denied, it’s likely because the IRS didn’t think you provided enough proof of “reasonable cause.” However, a denial isn't necessarily the end of the road. You can appeal the decision, ask for a review or consider other avenues for tax relief, according to Shirshikov.

“A denial is usually accompanied by an explanation which can give you useful insights to prepare a stronger, nonstandard appeal,” he said.

» LEARN: Are Tax Relief Companies Legit?

Is penalty abatement worth pursuing?

Requesting penalty abatement is a relatively straightforward process that doesn’t cost anything (unless you decide to have representation from a legal or financial expert). So, if your financial situation is seriously impacted by the IRS penalties you owe, penalty abatement might be a good option to pursue.

Some key factors to consider when deciding whether or not to ask for penalty abatement include the following, according to Shirshikov:

• Supporting evidence: Do you have enough documentation to prove reasonable cause?
• Benefits of reduced penalties: Will the abatement have enough positive impact on your financial situation to be worth the time and effort?
• Likelihood of future IRS scrutiny: Receiving a penalty abatement could put you “on the radar” with the IRS, making future audits or scrutiny more likely.