The IRS Hit Me With Penalties — IRS Penalty Abatement Guide to Remove or Reduce IRS Penalties

Few things create more financial shock than opening a letter from the IRS and seeing that your balance has exploded because of penalties. Many taxpayers discover penalties that equal — or exceed — their original tax debt.

But here is what most people don’t know → IRS penalties are negotiable. Many penalties can be removed.

📘 References:

• IRS Penalties Overview
• IRS Penalty Relief Information
• IRS First-Time Abatement (FTA)
• IRS Publication 1 — Taxpayer Rights

Why Did the IRS Hit You With Penalties?

The Internal Revenue Code (IRC) authorizes the IRS to impose penalties for non-compliance.

1️⃣ Failure-to-File Penalty (IRC §6651(a)(1))

This penalty is assessed when a taxpayer fails to file their tax return by the due date (including extensions), unless the failure is due to reasonable cause and not willful neglect.

• Accrual Rate: 5% of the unpaid tax for each month or part of a month that the return is late.
• Maximum Limit: The penalty is capped at 25% of the unpaid tax.
• Significance: This is often cited as one of the steepest penalties the IRS can impose, emphasizing the importance of timely filing, even if you cannot afford to pay.

2️⃣ Failure-to-Pay Penalty (IRC §6651(a)(2))

This penalty is assessed when a taxpayer fails to pay the amount of tax shown on a return by the due date.

• Accrual Rate: 0.5% of the unpaid tax for each month (or fraction of a month) the tax remains unpaid.
• Maximum Limit: The penalty is also capped at 25% of the unpaid tax.
• Interaction: 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 ensures the total penalty for combined non-compliance is manageable, though still substantial.

3️⃣ Accuracy-Related Penalty (IRC §6662)

The penalty applies when there is an underpayment of tax due to a taxpayer’s mistake or misconduct, but not fraud.

• Penalty Rate: 20% of the portion of the underpayment of tax that is attributable to negligence or disregard of rules or regulations.
• Common Grounds for Assessment:
  • Negligence or disregard of rules or regulations.
  • Substantial Understatement of income tax.
  • Substantial Valuation Misstatements (e.g., overvaluing charitable donations).
  • Disallowed deductions or underreported income.

Taxpayers should prioritize accurate recordkeeping, compliance with tax rules, and making correct estimated tax payments. Demonstrating reasonable cause and good faith is the primary defense if an error occurs. 

4️⃣ Civil Fraud Penalty (IRC §6663)

This severe penalty is reserved for cases where the IRS can prove that the underpayment was due to the intent to cheat the government.

• Penalty Rate: 75% of the portion of the underpayment attributable to fraud.
• Engage a Tax Professional: Given the severity and high burden of proof for a civil fraud penalty, it is crucial to be represented by an attorney authorized to practice before the IRS. A professional can help navigate the complex process and present effective arguments.

5️⃣ Trust Fund Recovery Penalty (IRC §6672)

This penalty targets business owners or key employees who are responsible for collecting, accounting for, and paying over payroll taxes (income tax withholding, FICA taxes) to the IRS. These are known as “trust fund taxes.”

• Penalty Rate: 100% of the trust fund portion of the unpaid payroll tax liability.
• Target: Assessed against responsible individuals who willfully fail to remit these taxes, making them personally liable even if the business is insolvent.

6️⃣ Information Return Penalties (IRC §6721 & §6722)

These penalties are designed to ensure businesses accurately and timely file necessary reports with the IRS and furnish copies to payees.

• Applies to Failures Regarding:
  • Filing returns with the IRS (e.g., 1099s, W-2s, payroll returns).
  • Furnishing correct payee statements.
• Impact: Penalties can accumulate rapidly based on the number of forms involved, posing a significant financial risk for businesses that fail to comply.

7️⃣ Estimated Tax Penalty (IRC §6654)

This penalty is assessed against individuals (including estates and trusts) who have a tax liability that is not sufficiently covered by withholding, resulting in an underpayment of estimated taxes due quarterly.

• Trigger: Assessed when a taxpayer misses or underpays one or more of the required quarterly estimated tax payments.

How to Get IRS Penalties Removed (Abatement)?

Yes, many IRS penalties can be removed or “abated” if the taxpayer can demonstrate they acted responsibly or meet certain criteria. The two primary methods for penalty removal are Reasonable Cause Relief and the First-Time Abatement (FTA) program.

✔️ Reasonable Cause Relief

This relief is available for a variety of penalties (including Failure-to-File, Failure-to-Pay, and Accuracy-Related) when the taxpayer can show that they exercised ordinary business care and prudence but were still unable to meet their tax obligations.

• Standard: Requires a detailed explanation and documentation proving the failure was due to circumstances beyond the taxpayer’s control (e.g., serious illness, death in the family, fire, natural disaster, reliance on erroneous advice from an IRS agent).

✔️ First-Time Abatement (FTA)

The First-Time Abatement (FTA) program is often the easiest and fastest method for penalty relief because it is based on your compliance history rather than a detailed reason for the failure.

• Eligibility Requirements: To qualify for FTA, you must meet three criteria:
  1. Clean History: You must have no prior penalties (excluding the Estimated Tax Penalty) for the preceding three tax years.
  2. Filed Returns: All required tax returns are now filed or have been filed.
  3. Paid Taxes: All required tax payments are made or you are in an approved payment arrangement (e.g., Installment Agreement).
• Penalties Covered: FTA can remove the following penalties:
  • Failure-to-File
  • Failure-to-Pay
  • Failure-to-Deposit (for businesses)
• Frequency: This relief is an administrative concession from the IRS and is available once every three years.

How a Tax Attorney Builds a Penalty Abatement Case?

A tax attorney approaches penalty abatement as a formal legal argument, constructing a comprehensive submission designed to persuade the IRS to grant relief. A strong case significantly increases the chances of success by addressing both the facts and the applicable law.

A successful penalty abatement submission is not just a letter; it’s a legal brief supported by evidence. Key elements include:

• A Compelling Narrative: A clear, concise story explaining why the failure occurred and why it meets the legal standard for Reasonable Cause or First-Time Abatement.
• Documentary Evidence & Exhibits: Concrete proof supporting the narrative, such as:
  • Medical or Disaster Records: For hardship claims.
  • Affidavits: Sworn statements from the taxpayer or relevant third parties.
  • CPA Statements: Explaining reliance on professional advice (when appropriate).
• Legal Arguments & Citations: Direct references to the law and IRS guidance:
  • Statutory Citations: Specific sections of the Internal Revenue Code (e.g., IRC §6651 for penalties).
  • IRM Support: References to the Internal Revenue Manual (IRM), which outlines the IRS’s own procedures and standards for granting relief.

Tax attorneys argue the case by focusing on specific points of failure or standards the taxpayer meets:

• Reasonable Cause vs. Negligence: The primary goal is to show the taxpayer acted with ordinary business care and prudence (Reasonable Cause) and the failure was not due to carelessness or intentional disregard (Negligence).
• Procedural Violations & IRS Standards: Arguing that the IRS itself made errors, such as:
  • Procedural Violations: The IRS failed to follow its own assessment or notice procedures.
  • IRS Internal Standards: The case meets the specific relief criteria outlined in the IRM.
• Legal Errors: Demonstrating that the underlying penalty was assessed based on a misinterpretation of tax law.
• Hardship Grounds: Presenting evidence of circumstances (e.g., severe illness, death, casualty) that directly prevented compliance.
• Taxpayer Bill of Rights Violations: Asserting that the IRS violated the taxpayer’s rights, such as the right to be informed or the right to a fair and just tax system.

By combining detailed evidence with precise legal and procedural arguments, the tax attorney aims for the dramatic improvement in success rates that is characteristic of a well-prepared legal submission.

📘 References: Form 2848 – Power of Attorney

Facing IRS Penalties? We Offer Expert Relief

If you have been assessed substantial IRS penalties, you do not have to accept them. Penalties often dramatically increase your total tax liability, but they can frequently be challenged and removed.

Our firm is experienced in resolving disputes related to the most common (and most severe) IRS penalties, including:

• Failure-to-File and Failure-to-Pay Penalties
• Accuracy-Related and Negligence Penalties (IRC §6662)
• Civil Fraud Penalties (IRC §6663)
• Trust Fund Recovery Penalties (IRC §6672)
• Penalties resulting from a recent audit or penalties that have dramatically increased your overall tax due.

At Pelham PLLC, we focus on eliminating or significantly reducing excessive IRS charges using proven legal strategies:

Contact us today for a confidential penalty relief consultation. We are committed to protecting your income, your rights, and your future—and we start the process of challenging the IRS immediately.

FAQs

Can IRS penalties really be removed?

Yes — through reasonable cause and FTA.

What is First-Time Abatement?

A one-time penalty removal for taxpayers with clean compliance for the past 3 years.

Does IRS remove penalties for medical hardship?

Yes — if documentation is strong.

Do IRS penalties expire?

Generally after 10 years (same as tax debt).

Should I call the IRS myself to request penalty relief?

No — statements can damage your case. Use a tax attorney.