Chapter 4- IRS Penalties and Penalty Relief Solutions

Reduce or remove IRS penalties using methods such as first-time abatement and reasonable cause

Chapter 4

IRS Penalties and Penalty Relief

INTRODUCTION

If you want to:
Understand how the IRS administers and assesses penalties and the options for relief.
Request relief from the two most common abatable penalties: failure to file and pay.
Contest accuracy penalties proposed in an audit or underreporter notice.
Use templates to request penalty relief.
Use IRS Forms to request penalty relief and appeal adverse penalty determinations.
Review common IRS penalty notices.
Read IRS penalty publications.

Key Highlights:

Penalties are the most common IRS post-filing issue: there were almost 50.7 million penalties assessed to taxpayers in 2024. [IRS Data Book, 2024, Table 28]
Many types of penalties, but three penalties make up 95% of all penalties assessed to individual taxpayers: the following three penalties make up 95% of all penalties: failure to pay (FTP), failure to file (FTF), and the estimated tax (ES) penalty. [IRS Data Book, 2024, Table 28]
ES penalties are addressed at filing: use Form 2210 (individuals) when filing to apply for exceptions to the ES penalty.
Most common penalty relief: most taxpayers request abatement for the FTP and FTF penalties for first-time abatement or reasonable cause.
First-time abatement for FTF and FTP penalties: taxpayers with a clean compliance history can request abatement for any amount of penalty by phone. [IRM 20.1.1.3.3.2.1 (3-29-2023)]
Reasonable cause abatement: taxpayers can request abatement, in writing, for cause. Many reasonable cause abatements are denied, which requires the taxpayer to appeal the denial and to obtain abatement. [[IRM 20.1.1.3.2 (11-21-2017)]]
Accuracy penalties in an audit or CP2000 notice: taxpayers should address proposed accuracy penalties during the audit/CP2000 notice by showing that they made a reasonable attempt to file an accurate return. Post-assessment abatement of accuracy penalties usually requires that the taxpayer request audit or CP2000 reconsideration.

Penalty Problem/Solution Grid

What’s New for 2025?

Late payment relief for 2020 and 2021 returns ends in 2024: on December 18, 2023, the IRS provided automatic failure to pay penalty relief for 2020 and 2021 returns for Forms 1040, 1120, 1041, and 990-T filers (IRS FS-2023-28, Dec. 2023). The failure to pay penalty relief period begins on the date the IRS issued an initial balance due notice to the eligible taxpayer, or February 5, 2022, whichever is later. The penalty relief was provided through March 31, 2024. After that date, the IRS will continue to charge the failure to pay penalty on any outstanding balance owed.
Penalty appeals hearings: owing to IRS operational backlogs and systemic issues in recording penalty abatement appeals requests, penalty appeals hearings have taken up to two years to schedule a telephone or video conference with an IRS Appeals Officer. IRS officials are working to reduce the backlogs, but waiting time and tracking of penalty appeals cases is still an issue with the IRS.

What’s Covered in This Section?

Step-by-step approach to resolving a penalty issue.
How to identify if a taxpayer has a penalty on their account.
How to request penalty abatement for the most common IRS penalties: failure to file and failure to pay.
How to request relief from the accuracy penalties in an audit or CP2000 notice.
How to request reconsideration of an accuracy penalty already assessed in a CP2000 notice or audit.
How to appeal a denied penalty abatement determination.

What’s Not Covered — and Why?

The rare penalties: as mentioned above, most taxpayers request penalty relief for three penalties — failure to file, failure to pay, and the accuracy penalty for negligence/disregard of rules and regulations or substantial understatement. The other 150+ penalties are rarely assessed but many of the principles and format covered in this section can help with these rare penalty assessments.

Most Common Taxpayer and Tax Professional Actions Performed When Addressing Penalty Issues

Identifying penalties assessed to a taxpayer.
Evaluating penalty abatement exceptions and options to abate.
Requesting abatement of failure to file and failure to pay penalties using reasonable cause and first-time abatement.
Contesting accuracy penalties in an audit or CP2000 notice.
Requesting CP2000 or audit reconsideration for assessed accuracy penalties.
Appealing penalty abatement denials to the IRS Independent Office of Appeals.

When to Get an Expert Involved

IRS penalty appeals: dealing with the IRS Independent Office of Appeals on a denied penalty abatement of a significant amount.
International penalties: evaluating options and dealing with the IRS on international issues, a focus area of IRS compliance enforcement.
Fraud penalties: when there are indications of fraud, taxpayers should always consult a qualified attorney.
Large dollar penalties: where more formal requests need to be made and procedures followed to request penalty relief.
Office and field audits: where IRS auditors can assess accuracy and fraud penalties.
Claim for refund procedures: when the IRS issues a formal Notice of Claim Disallowance and the taxpayer must file suit to recover past paid penalties.

Professional Assistance Fees

Hourly: Range from $80-$500 an hour for an EA, CPA, or tax attorney to represent. Some tax pros accept contingency fees on abatement of assessed penalties as allowed in Treasury Circular 230.
Flat fee: National firms can charge flat fees from $500+ depending on the amount of penalty and complexity of the issues involved.
No fee: Low-income taxpayer clinics can assist taxpayers free of charge.

Closely Related Issues

Unfiled returns: late filed, balance due returns will have a failure to file/failure to pay penalty assessment in which the taxpayer should consider requesting non-assertion/abatement, depending on their circumstances.
IRS Collection: balance due taxpayers who accrue the failure to pay penalty often cannot pay the penalty and need to consider collection alternatives to full payment.
Audits and CP2000 notices: where accuracy penalties are proposed and contested.

Time to Complete Estimates for Common Penalty Relief Solutions/Actions

Penalty Relief Action	Estimated Hours to Complete	Average Duration Estimate
Obtaining tax history and transcripts from the IRS to evaluate penalties assessed and penalty history (for first-time abatement and penalty request background information)	<1 hour (best to call IRS by phone)	1 day-3 weeks (if transcripts come by mail)
Request first-time abatement for failure to file/failure to pay penalties	<1 hour (by phone or online)	3 weeks for the abatement to be recorded on the taxpayer’s IRS account
Reasonable cause abatement request for failure to file/failure to pay penalties	3-5 hours (request in writing)	16-20 weeks for IRS determination letter
Appealing a denied penalty abatement request for failure to file/pay with IRS Independent Office of Appeals	3-10 hours	12-24 months
Responding to an accuracy penalty proposal in an audit	3-10 hours (depending on complexity)	Up to 30 days (audit/manager to make decision)
Responding to an accuracy penalty proposal in a CP2000 notice	1-3 hours	3-5 months
Appealing a denied penalty abatement request for the accuracy penalty with IRS Independent Office of Appeals (CP2000 or audit)	3-10 hours (depending on complexity)	4-12 months
Audit or CP2000 reconsideration request for penalty abatement (post-assessment)	2-20 hours	Can take up to a year or more, depending on the complexity of the original audit/CP2000.

UPDATES TO THIS CHAPTER

7/20/2025: updated with latest IRM citations

OVERVIEW OF INDIVIDUAL IRS PENALTIES AND PENALTY RELIEF

This section covers how the IRS administers penalties, common IRS penalties, and relief options.

Topic	Covers
Introduction to IRS Penalties and Penalty Administration	The types of IRS penalties, how many penalties are assessed annually, and how many penalties are abated annually.
Relevant IRM Sections for Penalties and Penalty Relief	IRS guidance given to IRS personnel on how to administer and grant relief for penalties.
IRS Forms/Publications Related to Penalties and Penalty Relief	IRS forms and publications used in assessing and granting relief from penalties.
Frequently Used IRS Penalty Phone Numbers	Common IRS phone numbers used to understand penalties assessed and to request penalty relief.
Common IRS Notices and Taxpayer Notifications Related to Penalties	Common IRS notices used by the IRS in penalty determinations.
Useful IRS Website Resources and IRS Online Tools to Help with Penalty Relief	IRS web pages and online tools that are helpful in understanding penalties assessed and requesting relief from penalties.
Key Terms and Definitions	Important terms to understand when requesting penalty relief.
Identifying IRS Penalties	How to identify penalties from IRS personnel and transcripts.
Five Reasons for IRS Penalty Relief	The five primary reasons the IRS does not assert or will abate penalties, including the two most common reasons: reasonable cause and first-time abatement.
Abatement of Interest	The rare reasons when the IRS abates interest and how to request interest abatement.
Statute of Limitations to Request Penalty Abatement	The time limit to request penalty abatement.

Other helpful sections:

Topic	Covers
IRS Transcripts	How to request and read IRS transcripts, including how to identify IRS penalties from an account transcript.
Overview of IRS Practice and Working with the IRS after Filing	How to obtain information from the IRS, including penalties and the status of penalty abatement requests.

Key Highlights:

Penalties are the most common IRS tax problem. The IRS issued 50.7 million penalties in 2024. Most penalties resulted from late filing, late payment or filing an inaccurate tax return.
Penalty relief is usually a request for non-assertion of a penalty or removal of a penalty (called penalty abatement). The type of penalty dictates the available options for relief.
There are three penalties most commonly assessed by the IRS: failure to pay, failure to file, and the estimated tax penalty. Accuracy penalties for failing to file an accurate tax return are not common, but an accuracy penalty may be costly in an audit or CP2000 notice.
The two most common penalty abatement reasons for the failure to file and failure to pay penalties: First-time abatement (FTA) and reasonable cause.

Introduction to IRS Penalties and Penalty Administration

In 1955, there were approximately 14 penalty provisions in the Internal Revenue Code. There are now more than ten times that number. [[IRM 20.1.1.1.1 (11-25-2011)]] In 2024, the IRS issued almost 50.7 million civil penalties to taxpayers. [IRS Data Book, 2024, Table 26] Eighty-four percent of IRS penalties are assessed against individual taxpayers for late filing, late payment, or filing an inaccurate return. [IRS Data Book, 2024, Table 28]

Purpose of Penalties

The purpose of IRS penalties is to enhance voluntary compliance and to promote sound tax administration by deterring noncompliant conduct. [IRS Policy Statement 20-1 at IRM 1.2.1.12.1 (6-29-2004)] Penalties should not be used by the IRS to generate revenue. However, in 2024, the IRS issued over $84 billion in penalties to all taxpayers. [IRS Data Book, 2024, Table 28]

IRS and Penalty Administration

The IRS is required to administer penalties consistently, uniformly, and accurately. It must make penalty determinations impartially and give the taxpayer the opportunity to contest the penalty. [IRS Policy Statement 20-1 at IRM 1.2.1.12.1 at (9) (6-29-2004)] The IRS stresses that penalties are not a “bargaining point” in resolving taxpayer tax return adjustments, especially when negotiating a settlement of an IRS audit with an IRS auditor or the IRS Independent Office of Appeals. [IRM 1.2.1.12.1 at (9) (6-29-2004)] Taxpayers may request relief from penalties based on their facts and circumstances and the applicable law.

Practice Tip: IRS rules do not allow auditors or their managers to settle cases by arbitrarily removing penalties. However, because most penalty determinations are subject to the interpretation of how the law applies to the taxpayer’s facts and circumstances, many IRS managers will consider waiving some or all penalties in an audit to secure an agreement on a case if the taxpayer has a credible argument for penalty relief.

The IRS provides procedural guidance for penalty relief through part 20 of its Internal Revenue Manual and through various internal resources. One resource used by the IRS to make individual penalty abatement determinations for the failure to file and failure to pay penalties is the IRS’s “Reasonable Cause Assistant” (RCA). [[IRM 20.1.1.3.6 (10-19-2020)]]The RCA is an automated tool used by IRS employees to assist in a penalty abatement determination based on reasonable cause or the first-time abatement criteria. [[IRM 20.1.1.3.6.1 (3-29-2023)]]

Most Common Penalties and How They Are Assessed

IRS penalties fall into three categories of noncompliance: underpayment, non-filing, and underreporting. The costliest IRS penalties are for non-filing (failure to file penalty) and underreporting (accuracy and fraud). The IRS uses its computer systems to automatically assess taxpayers late filing and late payment penalties when taxpayers file and pay late. For underreporting penalties (accuracy and fraud), the assessment process is more involved. If the accuracy penalty originates from a matching notice (i.e., a CP2000 Underreporter Notice), the accuracy penalty for negligence or substantial understatement is automatically applied if IRS procedural business rules are met. [[IRM 20.1.1.2.3.2 (10-19-2020)]] For example, if the taxpayer has a prior CP2000 notice, the new CP2000 notice will automatically assess an accuracy penalty for negligence. If the taxpayer meets the substantial understatement criteria, the accuracy penalty for substantial understatement will automatically be assessed on the CP2000. [See Automated Underreporter (CP2000) Notices Section for more information on accuracy penalty assessments for CP2000 notices]

For audits, accuracy penalties must be assessed by the auditor (revenue agent, tax examiner, tax compliance officer) and concurred by their manager. [[IRC §6751(b)(1)]]

The primary and most common penalties for each category of noncompliance is as follows:

	Category of Noncompliance
	Underpayment	Non-filing	Underreporting
Definition	Failure to pay taxes owed.	Failing to file a required return.	Failing to file an accurate return.
Primary penalties	Failure to pay (FTP) Estimated tax (ES)	Failure to file (FTF) Other international information return non-filing penalties (3520, 5471, etc.)	Accuracy Fraud
Maximum penalty amount	FTP: 25% (0.5% per month)ES: varies, closely approximates interest rate.	FTF: 25% (5% per month)	Accuracy: 20% Fraud: 75%
How assessed?	FTP: automatically through electronic means. ES: normally self-assessed with a filed tax return.	FTF: automatically through electronic means.	Accuracy or fraud in an audit: by an IRS person assigned to the audit (with concurrence by an IRS manager) Accuracy in a CP2000 notice: by electronic means if meets IRS procedural thresholds.
Average penalty amount (2024- individuals only)	FTP: $348 ES: $315	FTF: $1,583	Accuracy: $2,598 Fraud: $87,451

In terms of volume of penalties assessed for individuals, taxpayers are most frequently addressing a late filing and/or late payment penalty. For individuals, three penalties (failure to pay, estimated tax, and delinquency or late filing) make up 95% of all assessed penalties. [IRS Data Book, 2024, Table 28]

In terms of amount assessed, four penalties (failure to pay, delinquency/late filing, estimated tax, and accuracy) make up 99% of all penalty amounts assessed to individual taxpayers. [IRS Data Book, 2024, Table 28]

Taxpayers will need to address the accuracy penalty during the audit or CP2000 assessment process. The estimated tax penalty is generally addressed in the filing process (providing an exception on Form 2210). The failure to file and failure to pay penalties can be addressed at the time of filing (non-assertion request) or after assessment (request for abatement). Taxpayers may also appeal an adverse penalty abatement determination through various avenues afforded to them.

Penalty Abatement Data

For all taxpayers for 2024, only 6.5 million of the 50.7 million (13%) of all penalties assessed were abated. The number of abatements in 2024 were higher than normal years due to IRS automatic failure to pay penalty relief for 2020 and 2021 returns.

Taxpayers appear to focus on requesting abatement for the more costly penalty amounts. In 2024, 13% of penalties were abated. However, $75.2 billion of the over $84.1billion of all penalty amounts were abated. The IRS abatement amount data can be misleading as the IRS does not provide information on whether the IRS initiated relief, or the taxpayer requested abatement. In 2024, the IRS provided most of the relief automatically by summarily abating failure to pay penalties on many 2020 and 2021 returns as well as allowing significant tax and penalty abatements for employment taxes due to allowance processing of the Employee Retention Credit.

In practice, taxpayers can request abatement directly from the IRS, or the IRS may automatically abate penalties under certain circumstances. Likely, the amount of IRS penalties abated, in terms of dollars abated, are higher than the number abated due to taxpayers focusing on requesting abatement of higher penalty amounts. However, the IRS can abate penalties by itself and often does so when taxpayers request reconsideration of certain IRS assessments, such as a premature assessment for an audit, CP2000 underreporter notice, or a substitute for return filing.

By entity type, the percentages of the total number and dollar amounts of penalties abated for 2024 appear below:

For individuals, penalty abatement varies by the type of penalty assessed. Overall, 11% of all individual penalties were abated in 2024. Abatement for each of the major individual penalty types are as follows:

The amount of abatement data shows that taxpayers and the IRS generally address the more costly penalties. The average abatement by type of penalty are as follows:

Almost all delinquency penalties (for failure to file) were abated as part of the automatic penalty relief for failure to pay granted by the IRS on 2020 and 2021 returns. These penalties were automatically abated in August and September of 2022 and through 2024.

It is also likely that the IRS, not the taxpayer, automatically abated some of the larger amounts once the taxpayer corrected their noncompliance. For example, many delinquency (late-filing) penalties are asserted during the IRS non-filer enforcement procedures when a substitute for return (SFR) is filed by the IRS. Once the taxpayer files an original return and likely reduces the tax owed, the amount of the penalty is “abated” by the IRS automatically in the SFR reconsideration process.

Relevant IRM Sections for Penalties and Penalty Relief

Part 20 of the IRM provides the procedural rules for assessment and relief from all IRS penalties.

In practice, most individual taxpayers will likely need to address abatement of three penalties: failure to pay, failure to file, and the accuracy penalty.

When requesting abatement or non-assertion of IRS penalties, most individual taxpayers and their tax professionals will refer to the following IRM sections.

IRM Section	Topic	What It Covers
20.1.1	Introduction and Penalty Relief	Reasons the IRS abates penalties; procedures for penalty abatement.
20.1.2	Failure to file/failure to pay penalties	Procedures for assessment and abatement of the two of the most common penalties.
20.1.5	Return related penalties	Procedures for assessment of accuracy penalties for errors made on a tax return.
4.10.6	Examination of Returns: Penalty Considerations	Factors and IRS procedures for asserting penalties in an IRS audit (mostly accuracy penalties).

The forms listed below are commonly used to request penalty relief.

Form	Description
Form 843 (and instructions)	Claim for Refund and Request for Abatement (Penalty abatement request)
Form 12009	Request for Informal Conference and Appeals Review (Penalty review with IRS manager)
Form 12153	Request for a Collection Due Process or Equivalent Hearing (Collection)
Form 12203	Request for Appeals Review (Audit)

These publications help the taxpayer to understand IRS penalties assessed and penalty relief options, including appealing adverse penalty abatement determinations.

Publication	Description
Notice 746	Information About Your Notice, Penalty and Interest
Notice 1155	Disaster Relief from the IRS
Notice 1215	What to do If You Disagree with the Penalty
Publication 4576	Penalty Appeals: Orientation to the Penalty Appeals Process

Frequently Used IRS Penalty Phone Numbers

Taxpayers and tax professionals can use the following IRS contacts to get information about penalties assessed on taxpayers and to request relief:

IRS Hotline	Phone Number	Hours/Availability
Individual accounts (taxpayer hotline)	(800) 829-1040	M-F, 7AM-7PM, local time
Business and Specialty accounts (taxpayer hotline)	(800) 829-4933	M-F, 7AM-7PM, local time
Taxpayer Advocate National Hotline (central intake)	(877) 777-4778	M-F, 7AM-7PM, local time Local offices: 8AM-4:30PM
Practitioner Priority Service (tax professionals only)	(866) 860-4259 Option #2: Individual accounts Option #3: Business accounts	M-F, 7AM-7PM, local time.
IRS Penalty Hotline	855-223-4017 Ext. 225	M-F, 7AM-7PM, local time.
Automated Collection: Individuals (when a taxpayer has a balance owed and is in IRS Automated Collection)	(800) 829-7650 (W&I)	M-F, 8AM-8PM, local time.
Automated Collection: Self-employed and businesses (when a taxpayer has a balance owed and is in IRS Automated Collection)	(800) 829-3903 (SB/SE)	M-F, 8AM-8PM, local time.
IRS Appeals Assistance Hotline (status of appeals request, including penalty appeals cases)	559-233-1267	Leave message and will get response back in 24-48 hours with appeals assignment and contact info (call back will be between 7AM-3PM PT)
IRS Disaster Assistance Hotline	866-562-5227	M-F, 7AM-7PM, local time.

The following are the most common IRS notices when requesting and receiving a determination on penalty abatement for the failure to file and failure to pay penalties.

IRS Notice (primarily for electronically assessed penalties, i.e., FTP, FTF)	Description
Letter 168C/3502C/3503C	Service Center letter: Penalty abatement allowed, or additional information requested.
Letter 4722/4723/4724	IRS Collection letter: Penalty abatement allowed, or additional information requested.
Letter 852C/853C/854C	Service Center letter: Penalty Waiver or Abatement Disallowed/Appeals Procedure Explained.
Letter 2413/2414	IRS Collection letter: Penalty Waiver or Abatement Disallowed/Appeals Procedure Explained.
CP21B	Account adjustment: denotes the changes to the tax period/form as a result of penalty abatement.

Accuracy Penalty Notices

Accuracy penalties are proposed mainly during IRS audits and CP2000 notices. In an IRS audit, taxpayers would receive an examination report (Form 4549, Income Tax Examination Changes) outlining the accuracy penalty along with an explanation of why the accuracy penalty applies (Form 886-A, Explanation of Items). In a CP2000 underreporter inquiry, the IRS will propose the accuracy penalty on the CP2000 notice. If the audit or CP2000 is not resolved during the audit/CP2000 process or in IRS appeals, the taxpayer will receive a Statutory Notice of Deficiency (90-day letter, for example, an IRS Letter 531 or CP3219) that provides the calculation, amount, and explanation of the accuracy penalty proposed.

Useful IRS Website Resources and IRS Online Tools to Help with Penalty Relief

There are several IRS webpages and online tools that can provide assistance on penalty relief.

Website	URL	Description
IRS Penalty Relief website	https://www.irs.gov/payments/penalty-relief	Reasons for penalty relief.
IRS Adminstrative Penalty Waiver website information	https://www.irs.gov/payments/administrative-penalty-relief	First time penalty abatement criteria assistance.
IRS Online Penalty Appeal Tool	https://www.irs.gov/appeals/penalty-appeal	Online interview to assist in making decision on whether to appeal an adverse penalty abatement determination.
IRS Tax relief in Disaster Situations	https://www.irs.gov/newsroom/tax-relief-in-disaster-situations	Help and penalty relief for recent disasters.
IRS Disaster Relief, by State	https://www.irs.gov/newsroom/around-the-nation	List of disaster relief by state.
IRS Transaction Code Book (IRS Document 6209), Section 10	https://www.irs.gov/pub/irs-6209/section_10_2023.pdf	IRS transaction codes for all penalties listed on account transcripts.
FEMA disaster website	https://www.fema.gov/disaster	Lists of all declared disasters and the FEMA disaster number required for IRS penalty relief.
IRS “Your online account” tool	https://www.irs.gov/payments/your-online-account	Taxpayer IRS online account that provides transcripts and account information.
IRS Delinquent International Return Submission Procedures	https://www.irs.gov/individuals/international-taxpayers/delinquent-international-information-return-submission-procedures	How to address late-filed international information return penalties for reasonable cause.

Key Terms and Definitions

Term	Definition
Abatement	Penalty relief after the penalty has been assessed. Generally applicable to most IRS penalties that are automatically assessed by electronic means (i.e., failure to file and failure to pay penalties).
Account transcript (AT)	An IRS record of transactions on a taxpayer’s filed return or assessment for each form/tax period. Included in the AT are return filing dates, payments, assessments, and certain IRS enforcement activity, including some notices sent to the taxpayer. Also included are penalty assessments.
Accrued penalties	Usually refers to the failure to pay penalties that accrue on the unpaid balances owed until paid.
Accuracy penalty	A penalty for failing to file an accurate tax return. The most common accuracy penalties are for negligence and substantial understatement. Generally, the penalty is 20% of the underpayment.
Assessed penalties	Usually refers to the amount of penalties for failure to file and/or pay that is assessed at the time of filing.
Disaster relief	Federally declared relief for a large group of taxpayers located in an area affected by a disaster. Disaster area relief provides taxpayer an extended deadline to file and pay with no penalty.
Estimated tax penalty (ES) penalty	The penalty for not properly paying taxes owed throughout the tax period. It represents lost interest on the withholding/estimated tax payment amounts that should have been paid to the IRS as income was earned through the year.
Failure to file (FTF) penalty	A penalty for filing a tax return after the due date. The penalty is 5% per month, up to 25%. For returns due on or after 12/1/2023, if the return is over 60 days late, the minimum penalty is $485 (or, if it is lesser, 100% of the tax required to be shown on the return). This penalty is reduced by the failure to pay penalty for any month where both penalties apply.
Failure to pay (FTP) penalty	A penalty for not paying taxes on time. The rate is 0.5% per month of tax not paid by due date, April 15; 0.25% during approved installment agreement (if return was filed on time, and taxpayer is an individual); 1% if tax is not paid within ten days of a notice of intent to levy. The maximum penalty is 25%. This penalty along with the FTF penalty, cannot exceed 47.5%.
First-time penalty abatement (FTA)	A one-time IRS administrative penalty relief waiver for the failure to file/pay/deposit penalties for taxpayers with a clean compliance history.
Non-assertion	Penalty relief before the penalty has been assessed.
Reasonable cause (RC)	Any reason which establishes that that a taxpayer used ordinary business care and prudence to meet their federal tax obligations but were nevertheless unable to do so.
Reasonable Cause Assistant (RCA)	IRS automated tool used to determine whether the taxpayer qualifies for penalty abatement.
Statute of limitations	For penalty relief, the taxpayer generally has three years from the due date of the return or two years after the penalty has been paid to request abatement and a refund of the penalty paid.
Willful neglect	Conscious, intentional failure to comply with the provisions of the law, or reckless indifference to such provisions.

Identifying IRS Penalties

There are three ways to identify the amount of IRS penalties assessed on a taxpayer.

Contact the IRS: the IRS accounts management and PPS (tax practitioners) hotlines provide the total amounts of penalties, by type of penalty, for each year.
IRS notices: many IRS notices contain the amount of penalties assessed. However, for ongoing penalties, like the failure to pay penalty, an IRS notice should not be relied upon to quantify the total amount of penalties assessed.
IRS account transcripts: IRS account transcripts provide the amount of assessed penalties and are especially helpful for determining the total amount of failure to file, estimated tax, and accuracy penalties. IRS account transcripts may not provide a complete picture of total failure to pay penalties until the taxpayer has paid the entire balance owed for the account transcript year/form.

IRS Account Transcripts

IRS account transcripts may be used to identify many commonly assessed penalties. Account transcripts are available by year, by form. For example, a taxpayer’s 2017 Form 1040 will have its own account transcript with transactions on that tax year/form. Common transaction codes for return related late filing, late payment, and accuracy penalties will appear in the transaction section of the account transcript with the following transaction codes.

Transaction code (TC)	Penalty description
160, 166	Failure to file
270, 276	Failure to pay
240	Accuracy
170, 176	Estimated tax
320	Fraud

An example of an assessed estimated tax, late filing, and late payment penalty appears below:

Taxpayers with an outstanding balance on a tax year should not rely on the account transcript to determine the total amount of the failure to pay (FTP) penalty. The account transcript may not have the entirety of the accrued (FTP) penalties if the taxpayer has an outstanding balance. This occurs because IRS computer systems cannot update IRS account transcripts to show accrued FTP penalties until the taxpayer pays off the initial assessed balance. IRS systems keep track of how much FTP penalty the taxpayer owes, but most of the penalty is never officially assessed to the taxpayer’s account until there are funds in the account to pay all or part of the accrued penalty. [[TIGTA Report 2012-40-113, Penalty Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage Voluntary Compliance, (Sept. 19, 2012)]]

Practice Tip: Taxpayers and tax professionals should always call the IRS and get a “payoff amount” which will include the accrued FTP penalty. In addition, the taxpayer can access his or her online “View Your Tax Account” to see the accrued penalties.

IRS Civil Penalty Transcripts

Some miscellaneous penalties have special assessment procedures and do not appear on the taxpayer’s primary filed return (i.e., their Form 1040 tax module). These penalties create a separate transcript called a “civil penalty” transcript (called a “CIVPEN” tax module transcript).

Practice Tip: The IRS creates a separate “tax module” for each tax period and form for a taxpayer. In the case of a CIVPEN module, the IRS “form” is a “civil penalty” or “CIVPEN.” Tax professionals wishing to obtain information on the CIVPEN modules must be authorized for each “CIVPEN” module for each tax period on the Form 2848, Power of Attorney and Declaration of Representative.

Foreign information reporting forms are common examples where there may be penalties for the late filing of Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

Practice Tip: Individuals who are assessed the trust fund recovery penalty because they are a responsible person for unpaid payroll taxes are assessed a separate penalty which will be posted on a CIVPEN tax module.

The IRS also does not put the individual shared responsibility payment (the “ISRP” or 5000A penalty) on the Form 1040 account transcript. The IRS creates a separate tax module for the ISRP.

Practice Tip: A Power-of-Attorney/Appointee will not need to indicate the ISRP as a tax type on Form 2848 or 8821. The IRS allows a POA or third-party appointee with Form 1040 authorization to also obtain information and advocate for the ISRP 5000A penalty. [[IRM 21.3.7.8.3 (8-22-2023)]]

Five Reasons for IRS Penalty Relief

There are five primary reasons the IRS provides relief (non-assertion or abatement) from penalties. [[IRM 20.1.1.3 at (1) and (2) (10-19-2020)]]

Relief reason	Explanation	Example
IRS error	Rely on advice of IRS.	Relief from the accuracy penalty based on oral or written advice by the IRS on a tax return position.
Statutory exception	Specific exclusion defined in law.	Relief from late filing and payment penalties based on disaster area relief or combat zone.
Appeals – hazards of litigation	IRS settlement based on likelihood of winning in court.	Relief from accuracy penalties based on an audit appeals settlement that considers the hazards of litigation.
Administrative waiver	IRS nonassertion or abatement to facilitate tax administration.	Mostly, failure to file and pay penalty relief under the IRS’s first-time abatement policy, and failure to deposit penalty relief also for payroll taxpayers. IRS can announce an administrative waivers based on circumstances (e.g. COVID-19 failure to file and pay penalty relief)
Reasonable cause	Facts and circumstances test. FTF/FTP: circumstances outside the taxpayer’s control and not due to willful neglect that did not allow the taxpayer to comply Accuracy: a reasonable, good faith attempt to file an accurate tax return, or an honest misunderstanding of a material fact or law that is reasonable in light of all of the facts and circumstances.	Failure to file: long-term illness/incapacitation, ignorance of law/honest mistake. Failure to pay: financial hardship. Accuracy: reliance on third-party records, reasonable reliance on advice.

Penalty relief due to IRS errors is rare. Also, penalty relief due to hazards of litigation is generally reserved for audit determinations and accuracy penalties that are contested in the IRS Independent Office of Appeals. Taxpayers may also receive appeals settlements for the failure to file and failure to pay penalties when appealing adverse penalty abatement determinations.

Practice Tip: Taxpayers can request penalty relief by asking for non-assertion (before the penalty is assessed) or for abatement (after the penalty is assessed). The standard and most effective procedure for accuracy and estimated tax penalty relief is to request non-assertion when filing a tax return. In an audit or CP2000 notice, accuracy penalties are contested during the audit/CP2000 investigation before they are assessed. It is possible that the taxpayer can request abatement, but to do so they must request “reconsideration” of the audit or CP2000 findings. Estimated tax penalty relief is requested when filing a tax return using Form 2210. Taxpayers can amend the Form 2210 after the ES penalty is assessed to request abatement. However, very few ES penalties are abated because the standard procedure is for taxpayers to request relief on Form 2210 when filing the return.

Claiming Disaster Area Penalty Relief

The IRS is authorized to provide federal tax relief to taxpayers affected by a federally declared disaster. When a significant disaster occurs affecting a wide area of taxpayers that warrants a federally declared disaster, the IRS often issues special instructions to facilitate evaluating the request for penalty relief. [[IRM 20.1.1.3.3.6 (11-25-2011)]] Generally, most disaster relief provides taxpayers an extension to file and pay. Taxpayers need to comply with the extended deadlines to warrant relief from penalties. Taxpayers who miss the deadlines due to extenuating circumstances may get further relief by showing reasonable cause.

In disaster situations, IRS disaster area penalty relief is generally automatically applied to a taxpayer based on their physical location (identified disaster area zip codes). Once a disaster area is declared, the IRS puts a disaster freeze code on the taxpayer’s account that automatically provides the appropriate penalty relief. [[IRM 25.16.1.7 at (2) (6-25-2012)]](https://www.irs.gov/irm/part20/irm_20-001-001r#idm140719832893232) If a taxpayer is not afforded the automatic relief, they should request relief by following the disaster relief instructions provided in the IRS penalty notice.

When taxpayers contact the IRS to self-identify that they are impacted by a disaster, they must provide the reason why they meet the criteria to qualify for the disaster relief (i.e., located in the identified disaster area). No other proof of a taxpayer’s qualification is required. [[IRM 25.16.1.7.1 (10-8-2021]]

Although the relief provided may be short, the IRS, under Internal Revenue Code sections 6081 and 6161, may abate failure to file or failure to pay penalties for up to six months based on reasonable cause criteria. To receive the penalty abatement, a taxpayer must call the IRS at the toll-free number listed on the penalty notice and explain the situation to the assistor. The taxpayer may have to file Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. [[IRM 20.1.2.2.3.2 (2-27-2024)]]

Disaster relief also applies in situations where the taxpayer’s tax preparer is unable to file returns or make payments on behalf of the client because of the disaster. Taxpayers outside of the disaster area may qualify for relief if their preparer is in the disaster area, and the preparer is unable to file or pay on their behalf.

To obtain the postponement for filing or payment, the taxpayer must:

Call the Disaster Assistance Hotline at 1-866-562-5227,
Explain that the necessary records are located in a covered disaster area, and
Provide the FEMA disaster number of the county where the tax preparer is located. [https://www.fema.gov/disaster/declarations]

Two Most Common Penalty Relief Requests: First-Time Abatement and Reasonable Cause

Out of the five reasons the IRS abates penalties, taxpayers most often need to utilize one or both of the following two options:

First-time penalty abatement (FTA): an administrative waiver that abates the failure to file and pay penalties for one tax period for taxpayers with a clean compliance history (filed all required returns, no penalties in past three years other than estimated tax penalty, and in good standing with the IRS on outstanding balances owed).

Practice Tip: FTA does not apply to the accuracy penalty and the estimated tax penalty.

Reasonable cause (RC): a facts and circumstances test that provides a reasonable basis for noncompliance and penalty relief.

The IRS reports that over 1.7 million individual taxpayers qualify for FTA each year. Many taxpayers also have reasonable cause circumstances that warrant relief from penalties. Most IRS request for penalty relief are made requesting FTA or RC. IRS procedures call for all penalty abatements that qualify for FTA be classified as FTA even if RC applies. For example, if a taxpayer qualifies for both FTA and RC abatement in a year, the IRS will provide abatement based on FTA. [IRM 20.1.1.3.3.2.1 at (12) (3-29-2023)] This will disqualify the taxpayer from receiving FTA for the next three years. [Taxpayers can address multiple years of penalties by qualifying for FTA in year one and RC in a subsequent year.]

However, the IRS publishes that if a penalty is removed in the prior 3-year lookback for an “acceptable reason” other than FTA, the taxpayer is considered to have a clean compliance history for purposes of applying FTA. [https://www.irs.gov/payments/administrative-penalty-relief] In short, the IRS has been inconsistent in how they interpret the lookback period for FTA. Often, the IRS “codes” the penalty relief as FTA when reasonable cause applies, removing the ability for the taxpayer to use FTA for the next three tax years.

In 2019, the IRS allowed FTA on 264,715 taxpayers. In comparison, in 2019, only 18,926 taxpayers were granted reasonable cause abatement. [Taxpayer Advocacy Panel, 2020]

First-Time Abatement Application

FTA applies to many different individual, business, and specialty tax returns and may be used to abate the failure to file and the failure to pay penalty. For employment tax returns, FTA could also be used to abate the first period failure to deposit penalty.

FTA Qualifying Returns
Income tax returns: Form 1040 series, U.S. Individual Income Tax Return Form 1041, U.S. Income Tax Return for Estates and Trusts Form 1065, U.S. Return of Partnership Income Form 1120, U.S. Corporation Income Tax Return Form 1120S, U.S. Income Tax Return for an S Corporation
Employment tax returns: Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return Form 941, Employer’s Quarterly Federal Tax Return Form 943, Employer’s Annual Tax Return for Agricultural Employees Form 944, Employer’s Annual Federal Tax Return Form 945, Annual Return of Withheld Federal Income Tax
Excise tax returns: Form 720, Quarterly Federal Excise Tax Return Form 2290, Heavy Highway Vehicle Use Tax Return

FTA Qualifying Returns

Income tax returns:

Form 1040 series, U.S. Individual Income Tax Return
Form 1041, U.S. Income Tax Return for Estates and Trusts
Form 1065, U.S. Return of Partnership Income
Form 1120, U.S. Corporation Income Tax Return
Form 1120S, U.S. Income Tax Return for an S Corporation

Employment tax returns:

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Form 941, Employer’s Quarterly Federal Tax Return
Form 943, Employer’s Annual Tax Return for Agricultural Employees
Form 944, Employer’s Annual Federal Tax Return
Form 945, Annual Return of Withheld Federal Income Tax

Excise tax returns:

Form 720, Quarterly Federal Excise Tax Return
Form 2290, Heavy Highway Vehicle Use Tax Return

FTA does not apply to the following returns: [IRM 20.1.1.3.3.2.1 at (7) and (8) (3-29-2023)]

Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
Form 990 Series, Return of Organization Exempt from Income Tax
Form 1096/1099, Annual Summary and Transmittal of U.S. Information Returns (regarding failure to file information statements, such as Forms 1099, W-2G and 1098)
Form W-3/W-2, Transmittal of Wage and Tax Statements (regarding failure to file Forms W-2)
Form 5500 Series, Annual Return/Report of Employee Benefit Plan
Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Reasonable Cause Penalty Relief Application

Most penalties can be abated if the taxpayer has reasonable cause. For the most common penalties (FTF, FTP), reasonable cause relief applies. In addition, the accuracy penalty (proposed in audits and CP2000 notices) also has a reasonable cause exception. For the ES penalty, a reasonable cause exception does not apply. Taxpayers request relief from ES penalties by providing an exception on Form 2210.

The following table details IRS penalties that qualify for reasonable cause relief.

Penalty Section	Type of Penalty	Reasonable Cause Relief	Other Relief
IRC §6039E	Failure to Provide Information Concerning Resident Status	Yes	Yes
IRC §6651(a)(1)	Failure to File Tax Return	Yes	Yes
IRC §6651(a)(2)	Failure to Pay Tax When Due	Yes	Yes
IRC §6651(a)(3)	Failure to Pay within ten Days of Notice of Additional Tax Due (notices issued prior to 1/1/1997)	Yes	Yes
IRC §6651(a)(3)	Failure to Pay within 21 Days of Notice of Additional Tax Due (ten business days if amount is $100,000 or more) (notices issued after 12/31/1996)	Yes	Yes
IRC §6651(f)	Fraudulent Failure to File	No	No
IRC §6652(a)(1)	Failure to File Certain Information Returns	Yes	Yes
IRC §6652(c)(1)	Failure to File Annual Return by Exempt Organization	Yes	Yes
IRC §6652(c)(2)	Failure to File Returns Under IRC §6034 or IRC §6043(b)	Yes	Yes
IRC §6652(d)(2)	Notification of Change in Status of a Plan	Yes	Yes
IRC §6652(e)	Information Required in Connection with Certain Plans of Deferred Compensation—Form 5500, Annual Return/Report of Employee Benefit Plan	Yes	Yes
IRC §6652(h)	Failure to Give Notice to Recipients of Certain Pension, Distributions, etc.	Yes	Yes
IRC §6652(i)	Failure to Give Written Explanation to Recipients of Certain Qualifying Rollover Distributions	Yes	Yes
IRC §6652(j)	Failure to File Certification with Respect to Certain Residential Rental Projects	Yes	Yes
IRC §6654	Estimated Tax Penalty on Individuals	No	Yes
IRC §6655	Estimated Tax Penalty on Corporations	No	No
IRC §6656(a)	Failure to Deposit	Yes	Yes
IRC §6657	Bad Checks	Yes	Yes
IRC §6662	Accuracy-Related Penalty on Underpayments	Yes	Yes
IRC §6662A	Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions	Yes	Yes
IRC §6663	Fraud	No	No
IRC §6676	Erroneous Claim for Refund or Credit	Yes	No
IRC §6692	Failure to File Actuarial Report	Yes	Yes
IRC §6698	Failure to File Partnership Return	Yes	Yes
IRC §6699	Failure to File S Corporation Return	Yes	Yes
IRC §6721	Failure to File Correct Information Reporting Returns	Yes	Yes
IRC §6722	Failure to Furnish Correct Payee Statements	Yes	Yes
IRC §6723	Failure to Comply With other Information Reporting Requirements	Yes	Yes

Reasonable cause relief is a facts and circumstances test. Taxpayers must exercise ordinary business care and prudence when complying. Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur.

Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to timely meet the tax obligation.

Abatement of Interest

In rare circumstances, taxpayers may have interest charges abated. If the IRS calculated interest incorrectly or the taxpayer has cause for interest abatement, the taxpayer should request interest abatement via Form 843, Claim for Refund and Request for Abatement. [[IRM 20.2.7.14 (12-20-2023)]]

Most circumstances in which the IRS will abate interest involve an undue delay by an IRS employee. This occurs when an IRS employee caused an unreasonable error or delay and the taxpayer did not significantly contribute to the error or delay. Taxpayers should review IRM 20.2.7.5.1 (12-20-2023) for specific circumstances that are deemed unreasonable errors or delays that warrant interest abatement.

The IRS is also authorized to abate assessed interest due to a “mathematical error” on a return prepared by an IRS employee while preparing income tax returns in his or her official capacity or as a voluntary income tax assistance (VITA) volunteer. [[IRM 20.2.7.4.1 at (1) (12-20-2023)]]

Statute of Limitations to Request Penalty Abatement

Taxpayers requesting abatement of penalties must do so before the refund statute of limitations (RSED) expires — that is, within three years after the penalty is assessed or two years after the penalty has been paid. Tax periods with unpaid penalty assessments are open for abatement. [IRM 25.6.1.10.1 at (3) (10-2-2023)]

If the RSED is still open, taxpayers should request FTA as far back as 2001. Taxpayers can also request penalty abatement multiple times for the same year. For example, a taxpayer can request FTA for the FTP for a year with an open balance owed and request the abatement again after additional FTP has accrued. In practice, many taxpayers and tax professionals try to request FTA once by waiting until the balance is almost paid and the FTP penalty has stopped accruing.

IRS PENALTY ABATEMENT: LATE FILING AND LATE PAYMENT

This section covers how to request penalty relief for two common IRS penalties.

Topic	Covers
Common IRS Penalties	The three most common penalties: failure to pay, failure to file, and estimated tax; how taxpayers obtain relief from the estimated tax penalty.
Failure to Pay Penalty Basics	How the failure to pay penalty is computed and assessed, and what penalty relief options are available.
Failure to File Penalty Basics	How the failure to file penalty is computed and assessed, and what penalty relief options are available.
First Option for Abatement of FTF/FTP Penalties: First-Time Penalty Abatement	How to qualify and request first-time penalty abatement.
Reasonable Cause Abatement	What returns and conditions qualify for FTA and how to request FTA from the IRS.
Requesting Reasonable Cause Penalty Abatement	How to request reasonable cause penalty abatement.
Steps to Request FTF and FTP Penalty Abatement	The steps to follow to evaluate and request penalty abatement.
Appealing Adverse Penalty Abatement Determinations	Available options and how to appeal an adverse penalty abatement determination.
Late Filing Penalty Abatement for Related International Information Returns	Penalty relief options for individual penalty assessments for late filing of international information returns.
Example: FTF and FTP Reasonable Cause Abatement Request	A comprehensive example of an FTF and FTP penalty abatement request for reasonable cause.
Template Penalty Abatement Request Letter/Attachment to Form 843	A template to use when requesting penalty abatement.

Other helpful sections:

Topic	Covers
Overview of Unfiled Past-Due Tax Returns	How to resolve past due returns, including requesting relief from the failure to file penalty.
Additions to Unpaid Taxes: Failure to Pay Penalty and Accrued Interest	How to reduce the failure to pay penalty by entering into an installment agreement with the IRS.
IRS Transcripts	How to identify the amount of penalties assessed.

Key Highlights:

FTP and FTF penalties make up almost two-thirds of all penalties assessed on individuals. The IRS assesses these penalties automatically when the taxpayer files late and/or does not pay on time.
Most taxpayers must request relief from the FTP and FTF penalty by requesting abatement — that is, relief after the penalty has been assessed.
First-time penalty abatement and reasonable cause abatement are the two most common reasons to request abatement for the FTP and FTF penalties. FTA is the most common reason to request and receive abatement. The IRS has also released limited administrative penalty waivers for the FTF and FTP penalties as a result of taxpayer hardships during the pandemic.
Taxpayers can, and often need to, request an appeal if the IRS denies penalty abatement. There are several appeals options available to taxpayers with denied penalty abatement requests or with outstanding balances that include penalties.

Common IRS Penalties

Three penalties make up 95% of all penalties assessed on individual taxpayers:

The failure to pay (FTP) penalty: 52%
The estimated tax (ES) penalty: 35%
The failure to file (FTF) penalty: 8%

The FTP and FTF penalties are abated at much higher rates than the ES penalty. In 2022, the IRS automatically abated 2019 and 2020 FTF penalties for taxpayers who met certain conditions. In 2023 and 2024, the IRS abated FTP penalties for taxpayers who met certain conditions on 2020 and 2021 returns. As a result, the number of abatements for 2022-2024 were more than the total number assessed. [ Penalty Relief for Certain Taxpayers Filing Returns for Taxable Years 2019 and 2020 andIRS helps taxpayers by providing penalty relief on nearly 5 million 2020 and 2021 tax returns; restart of collection notices in 2024 marks end of pandemic-related pause .]

[IRS Data Book, 2024, Table 28]

FTP and FTF penalty relief may be requested prior to or after assessment. However, ES penalties are best addressed by applying for a waiver using Form 2210 when filing a return.

Estimated Tax Penalty Relief

The estimated tax (ES) penalty makes up 35% of all individual penalties. The ES penalty is a penalty for failure to prepay tax as required via withholding or estimated tax payments. However, taxpayers rarely request abatement for this penalty as most ES penalties are self-assessed or corrected by filing a Form 2210 with a tax return. The IRS may abate the ES penalty if it has made a computational error or the taxpayer provides a corrected Form 2210.

The penalty for underpayment of estimated tax cannot be removed or waived for reasonable cause alone. For the waiver to be available, both of the following conditions must be met: [[IRM 20.1.3.3.2.1.2 at (3) (7-23-2020)]]

The taxpayer’s failure to comply with the estimated tax requirements was due to casualty, disaster, or other unusual circumstances, and not due to any other reason.
Given all the facts, it would be against equity and good conscience to apply the penalty.

Practice Tip: In 2024 and earlier years, less than 3% of all ES penalties were abated and taxpayers are rarely successful at requesting ES penalty abatement. Most were abated by the IRS as a result of return changes that impacted the computation of the penalty. Taxpayers wishing to evaluate ES penalty abatement should review IRM 20.1.3.3.2.1 (3-31-2010) for reasons allowed by the IRS for ES penalty abatement.

The penalty for underpayment of estimated tax generally is not waived as a result of disaster. However, in the case of a federally declared disaster area, “the Secretary may specify a period of up to one year that may be disregarded” in determining whether estimated tax payments were paid on time. In these cases, the IRS will issue a memo with specific instructions regarding the payment of estimated tax in the affected area. [[IRM 20.1.3.2.7.1 (12-10-2013)]]

Waivers are sometimes granted by legislation, regulation, or administrative pronouncements to provide relief from ES penalties created by the retroactive application of a change in statute or Service position. [[IRM 20.1.3.2.7 (3-31-2010)]] For example, for 2018 tax returns, Congress provided relief from ES penalties due to the confusion to many taxpayers on how much to properly withhold as a result of tax reform. Taxpayers may apply this relief when filing. However, taxpayers who had already filed for tax year 2018 and did not take the qualifying relief may claim a refund by filing Form 843, Claim for Refund and Request for Abatement, and include the statement “80% Waiver of estimated tax penalty” on Line 7. [IRS News Release IR-2019-55 (March 22, 2019)] On August 14, 2019, the IRS announced that taxpayers would no longer have to request relief and that it would automatically waive ES penalties for eligible 2018 tax filers. [[IRS News Release IR-2019-144 (August 14, 2019)]] However, taxpayers who were not provided the automatic relief should request it using the procedures outlined in the March 22, 2019 news release.

In many cases, approved ES penalty waivers filed on Form 2210 with the return are automatically applied by IRS computers at the time of filing by suppressing the assessment of the penalty when filing a tax return. Taxpayers who are not given the automatic relief should file Form 843 to request the relief.

Failure to Pay Penalty Basics

More than half of all penalties assessed to individuals are for the failure to pay (FTP) penalty. Internal Revenue Code section 6651(a)(2) provides for a penalty if the tax shown on any return is not paid by the due date for payment, unless the failure to pay is due to reasonable cause and not due to willful neglect. In short, the FTP penalty applies whenever a taxpayer does not fully pay his or her taxes by the original due date of the return or the extended due date if an extension is filed and granted. In addition, if the taxpayer files an extension, he must have paid 90% of the final liability reported on the tax return before the due date of the return to avoid the FTP penalty. [[Treasury Regulation §301.6651-1(c)(3)]]

FTP Penalty Rates and Computation

Internal Revenue Code section 6651(a)(2) provides for the computation of the FTP penalty on the tax reported on the return. The normal rate is 0.5%, but the FTP penalty will change based on the taxpayer’s status with the IRS. The FTP rates are:

0.5% of the tax not paid by due date.
0.25% during an approved installment agreement (if the individual return was filed on time). [[IRM 20.1.2.3.8.1.2 (2-27-2024)]]
1% if the tax is not paid within ten days of a notice of intent to levy (ten days after notice of intent to levy — usually given by IRS notice CP504, LT11, Letter 1058). [IRM 20.1.2.3.8.1.1 (4-19-2011)]

The FTP penalty is a recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is paid in full or until the maximum cumulative penalty (25%) is reached. A full monthly charge applies, even if the tax is paid before the month ends.

For each month, the amount subject to this penalty is the portion of the amount shown as tax on the return that is not paid before the beginning of that month, either by payment, or by credit against the tax that may be claimed on the return. Detailed examples and guidance on FTP calculations are found in IRM 20.1.2.3.8 (4-19-2011) and its subsections.

When the taxpayer owes an additional amount as a result of a deficiency (i.e., an audit, CP2000 assessment, amended return, math error adjustment), the taxpayer will be assessed the FTP penalty if they do not pay the deficiency in full within 21 days of the date of notice and demand. [[IRM 20.1.2.3.8.5 (4-19-2011)]] The time to pay is reduced to ten business days if the amount in the notice and demand equals or exceeds $100,000. [Internal Revenue Code Section 6651(a)(3)] An example of how to compute the FTP penalty in the case of a notice and demand related to a deficiency is found at IRM 20.1.2.3.8.7.3 (2-27-2024).

The FTP penalty is coordinated with the FTF penalty. When both penalties are charged for the same month, the penalty for filing late is reduced by the penalty for paying late for that month. An example of how the two penalties are computed is found in IRM 20.1.2.3.8.7.1 (2-27-2024).

FTP Penalty Relief: Undue Hardship When Filing or When Assessed Additional Tax

Taxpayers can request abatement of the FTP penalty using first-time abatement (FTA). However, if the FTA does not apply, taxpayers can still request both non-assertion of the FTP penalty as well as abatement. Non-assertion should be requested for undue hardship or for reasonable cause. Abatement is requested for reasonable cause after the penalty is assessed.

Taxpayers who are unable to pay with their tax return, or upon receipt of a tax bill from an audit or CP2000, can request an extension of time to pay and relief from the FTP penalty. The extension to pay and penalty non-assertion may be proactively requested only if the taxpayer has an undue hardship. Taxpayers use Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, to request the extension of time to pay and the suppression of the FTP penalty. For filed tax returns, the penalty can be suppressed for six months. If the amount owed is due to a deficiency (audit, CP2000), then the taxpayer should qualify for 18 months of FTP relief. [[IRM 20.1.1.3.3.3 (08-05-2014)]]

The IRS defines an “undue hardship” as a substantial financial loss if you pay your tax on the date it is due. An undue hardship means more than a mere inconvenience to the taxpayer.

Taxpayers need to request relief in a timely manner using Form 1127. If a taxpayer is requesting an extension of time to pay the tax due on a current year return, Form 1127 must be received on or before the due date of that return, not including extensions. For taxpayers requesting an extension of time to pay an amount determined as a deficiency, Form 1127 must be received on or before the due date for payment indicated in the tax bill.

FTP Penalty Relief: Statutory Exceptions

Taxpayer may also qualify for abatement (i.e., relief after the penalty is assessed) if they meet one of the statutory exceptions to the penalty.

There are two statutory exceptions to a penalty for individual taxpayers and these can provide the basis for a request for abatement:

Internal Revenue Code section 6404(f) allowing abatement due to an IRS error: abatement of a penalty or addition to tax attributable to erroneous written advice by the Internal Revenue Service. [[IRM 20.1.1.3.3.4.1 (11-25-2011)]]
Internal Revenue Code sections 7508 and 7508A: for disaster area and combat relief.

Most disaster relief is provided automatically by the IRS. However, taxpayers who qualify for statutory relief and are not automatically granted the relief should request it on Form 843.

FTP Penalty Relief: Reasonable Cause

Taxpayers may also get abatement for the FTP penalty due to reasonable cause. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to pay the tax or would suffer an undue hardship if the tax was paid before the due date.

For the failure to pay penalty, reasonable cause is defined in Treasury Regulation §301.6651-1(c)(1):

In determining whether the taxpayer was unable to pay the tax in spite of the exercise of ordinary business care and prudence in providing for payment of his tax liability, consideration will be given to all the facts and circumstances of the taxpayer‘s financial situation, including the amount and nature of the taxpayer‘s expenditures in light of the income (or other amounts) he could, at the time of such expenditures, reasonably expect to receive prior to the date prescribed for the payment of the tax. Thus, for example, a taxpayer who incurs lavish or extravagant living expenses in an amount such that the remainder of his assets and anticipated income will be insufficient to pay his tax, has not exercised ordinary business care and prudence in providing for the payment of his tax liability. Further, a taxpayer who invests funds in speculative or illiquid assets has not exercised ordinary business care and prudence in providing for the payment of his tax liability unless, at the time of the investment, the remainder of the taxpayer‘s assets and estimated income will be sufficient to pay his tax or it can be reasonably foreseen that the speculative or illiquid investment made by the taxpayer can be utilized (by sale or as security for a loan) to realize sufficient funds to satisfy the tax liability. A taxpayer will be considered to have exercised ordinary business care and prudence if he made reasonable efforts to conserve sufficient assets in marketable form to satisfy his tax liability and nevertheless was unable to pay all or a portion of the tax when it became due.

In short, successful FTP reasonable cause arguments demonstrate the taxpayer’s significant financial hardship if the tax is paid. [[IRM 20.1.2.2.4.1 at (2e) (7-18-2016)]] “Insufficient funds” generally is not reasonable cause for failure to pay, unless the funds were depleted due to unusual or unforeseen circumstances. The manner in which the taxpayer handled his or her finances and unforeseen circumstances outside the taxpayer’s control are critical factors in determining reasonable cause.

The IRM provides some context of how the IRS determines significant hardship:[[IRM 20.1.2.2.4.1 at (2e) (7-18-2016)]]

Example 4-1 A taxpayer who was able to pay, but who needed the money to pay for necessary medical expenses, may be able to demonstrate that payment of the tax (in lieu of paying for the medical expense) would have resulted in a significant hardship. Similarly, significant hardship also exists if the taxpayer would only have been able to pay the tax by liquidating assets well below fair market value.

Practice Tip: IRS personnel, including appeals officers, often ask the following six questions to determine if the taxpayer qualifies for FTP penalty relief due to reasonable cause:

What evidence does the taxpayer have to show lack of funds to pay the tax?
What efforts were made to access equity in assets to pay?
What measures did the taxpayer take to get funds by 4/15?
Was the taxpayer only able to pay essential living expenses?
Was the taxpayer living beyond his or her means?
Were other creditors in arrears in addition to the IRS?

These questions provide the IRS insight as to how the taxpayer handled his or her finances and whether the situation was a significant hardship that was unforeseen and outside of his or her control. Taxpayers requesting FTP penalty abatement should be prepared to address and provide documentation to each question.

When taxpayers have multiple years and/or assessments, FTP reasonable cause is determined separately for each year and assessment. Taxpayers must provide their reasonable cause argument for each year and assessment when requesting FTP penalty abatement.

Practice Tip: Taxpayers should file separate penalty abatement requests for each year/assessment when they are requesting abatement for multiple years. Each request should provide the reasonable cause argument for each year/assessment.

IRS Notice 2024-7: Systemic Failure to Pay Penalty Relief

On December 19, 2023, the IRS announced broad-based FTP penalty relief for certain 2020 and 2021 returns due notice delay occurring during IRS operation interruptions due to the COVID-19 pandemic. The IRS provided FTP penalty relief to over 4.7 million taxpayers who were assessed an FTP penalty for 2020 and 2021. [IR-2023-244, Dec. 19, 2023] The relief applied ONLY to the FTP penalty.

Applicable returns include: [IRS Notice 2024-07, Dec. 19, 2023)

Form 1040 series
Form 1041
Form 1120 series
Form 990-T

To qualify, the taxpayer must owe less than $100,000 in assessed income tax. The $100,000 limit applies separately to each year. Taxpayers do not qualify for the relief in any year that has an assessed tax balance greater than $100,000. The assessed balance limit does not include applicable penalties and interest added to the balance after the initial assessment. Also, the taxpayer must have had the assessed tax bill before December 7, 2023, via IRS Notice CP14 (individual), CP161 (business) or its equivalent notice. This provision presumably removes many taxpayers who would have filed in the latter part of October 2023 or after.

The FTP penalty relief period begins on the date the IRS issued an initial balance due notice to the eligible taxpayer, or February 5, 2022, whichever is later. The penalty relief would only be provided through March 31, 2024. After that date, the IRS will continue to charge the FTP penalty on any outstanding balance owed.

Practice Tip: Taxpayers who qualify for relief should check their IRS account transcripts to confirm relief has been granted. FTP penalties show in the transaction section of an account transcript (transaction code 270/276). Abatements show up as a reversal of the penalty (transaction code 271/277). If the taxpayer qualifies for relief but it was not granted, they should contact the IRS Penalty Hotline immediately to request relief.

Failure to File Penalty Basics

When a taxpayer files a return late and has a balance owed, she will incur a failure to file (FTF) penalty. Internal Revenue Code section 6651(a)(1) imposes a penalty for failure to file a tax return by the date prescribed for filing (including extensions), unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

FTF Penalty Rate

For each month or part of a month that the return is late, the penalty is 5% of the amount subject to the penalty. The maximum penalty is 25% of the unpaid tax on the payment due date, unless the minimum penalty applies. Because the penalty cannot exceed 25%, it is not charged for more than five months. [[IRM 20.1.2.3.7.1 (04-19-2011)]]

The penalty for filing late is reduced by the amount of any penalty for paying late for any month during which both penalties apply.

The amount subject to the penalty is the tax required to be shown on the return, reduced by the following: [[IRM 20.1.2.3.7.2 (04-19-2011)]]

The amount paid on or before the date prescribed for payment of the tax without regard to any extensions of time to file or pay.
The amount of any credit against the tax that may be claimed on the return (i.e., credits, estimated taxes, and withholding)

Minimum Penalty for FTF

The FTF penalty has a minimum penalty amount. If the return is more than 60 days late, and the normal computed penalty is less than the amount listed in the table below, then a minimum penalty applies. The minimum penalty is the lesser of two amounts — 100% of the tax required to be shown on the return that was not paid on time, or a minimum dollar amount (adjusted annually for inflation): [[IRM 20.1.2.3.7.4 (2-27-2024) and https://www.irs.gov/payments/failure-to-file-penalty]

Return Due Date (w/o extension)	Minimum Amount
On or before 12/31/2008	$100.00
Between 01/01/2009 and 12/31/2015	$135.00
Between 01/01/2016 and 12/31/2017	$205.00
Between 01/01/2018 and 12/31/2019	$210.00
Between 01/01/2020 and 12/31/2022	$435.00
Between 12/31/2022 and 12/31/2023	$450.00
Between 12/31/2023 and 12/31/2024	$485.00
After 12/31/2024	$510.00

Fraudulent Failure to File

Internal Revenue Code section 6651(f) provides for an increase in the penalty rate for failure to file if the failure to file is fraudulent. The penalty rate is increased from 5% per month to 15% for each month or part of a month the return is late, and the maximum penalty is increased from 25% of the amount subject to IRC §6651(a)(1) to 75% of that amount. [IRM 20.1.2.3.7.5 (07-02-2013)]

The burden of proof is on the IRS to establish the fraudulent FTF penalty. There must be clear and convincing evidence that the FTF was done with the intent to evade taxes. The IRS considers these factors when applying the fraudulent FTF penalty: [[IRM 20.1.2.3.7.5 (07-02-2013)]]

The taxpayer refuses to, or is unable to, explain the failure to file,
The taxpayer’s statement does not agree with the facts of the case,
There is a history of failing to file or late filing, but an apparent ability to pay,
The taxpayer fails to reveal or tries to conceal assets,
The taxpayer pays personal and business expenses in cash when cash payments are not usual, or cashes rather than deposits checks that are business receipts, and
The taxpayer is aware of the filing requirement.

Fraudulent FTF cases are usually investigated and developed by IRS auditors (revenue agents and tax examiners). Before the penalty is imposed, IRS auditors must get the approval of an IRS manager and this must be concurred by an IRS Area Counsel attorney. [IRM 20.1.2.3.7.5.1 at (2) (07-02-2013)]

To assess a fraudulent FTF penalty, the IRS issues the taxpayer Letter 2777, Pre-Assessment Appeals Letter for the Fraudulent Failure to File Penalty, and provides the taxpayer the reasons for the penalty on Form 4549, Income Tax Examination Changes, and Form 886-A, Explanation of Items (these are the same forms used in an IRS audit). Consistent with the deficiency procedures in an IRS audit, taxpayers are given the opportunity to dispute the fraudulent FTF penalty before the penalty is assessed. [[IRM 20.1.2.3.7.5.1 (07-02-2013)]]

Practice Tip: Taxpayers should always file their required tax returns as soon as possible. In practice, the IRS rarely pursues the fraudulent FTF penalty on most non-filers – especially if the taxpayer immediately complies with a request to file a late return. High-wealth, higher income, and self-employed taxpayers generally can experience higher incidents of fraudulent FTF enforcement. Usually, most IRS fraudulent FTF cases originate from multiple year taxpayer delinquency investigations conducted by IRS Collection field personnel (revenue officers) or from related audits conducted by IRS auditors (revenue agents, tax compliance officers, or tax examiners).

Taxpayers should contest the fraudulent FTF prior to assessment. However, if the fraudulent FTF is already assessed, taxpayers can request abatement. Because most fraudulent FTF penalties are assessed in the audit process, taxpayers usually will be forced to request post-assessment abatement by requesting audit reconsideration or using IRS claim for refund procedures.

FTF Penalty Relief

The FTF penalty can be costly to a taxpayer filing late. For example, a taxpayer who files more than five months late and owes $10,000 will have an additional “delinquency” penalty (delinquency penalty is a common term used by the IRS to describe the combined FTF and FTP penalty for the first five months, which is limited to 25%) of $2,500.

Taxpayers may request penalty relief at the time of filing a late return (non-assertion of the penalty) or after the penalty is assessed (request for abatement). If the taxpayer has disaster relief, the IRS will generally provide an extended deadline to file to avoid the FTF penalty. The penalty is automatically suppressed based on the taxpayer’s location in a disaster zone (the IRS puts a disaster area code on the taxpayer’s account based on their zip code).

FTF Penalty Relief: Reasonable Cause

Taxpayers can request abatement for the FTF penalty due to reasonable cause. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to file a return within the prescribed period. It is a facts and circumstances test.

There are many circumstances that establish reasonable cause. In practice, taxpayers should be aware of two circumstances that are not considered reasonable cause by the IRS for late filing:

Undue economic hardship or inability to pay; the inability to pay does not waive the taxpayer’s obligation to file on time.
Reliance on a tax professional to timely file; the current IRS position is that taxpayers cannot delegate their obligation to file to a third party.

Practice Tip: Taxpayers often rely on their tax preparer or tax software for filing compliance. Often taxpayers claim to the IRS that they hired a tax preparer to file and thought the return was filed. Taxpayers may even show that they signed the e-file authorization that allows the tax preparer to directly e-file the tax return. However, taxpayers who solely rely on reliance on tax preparer or tax software are likely to have their penalty abatement request denied. Taxpayers should not use reliance on a tax pro/software as a primary argument but argue other applicable related reasons such as unable to access records or ignorance of the law. [[IRM 20.1.1.3.2.2.5 at (4) (11-21-2017)]]

First Option for Abatement of FTF/FTP Penalties: First-Time Penalty Abatement

Since 2001, the IRS ordinarily provides penalty relief for taxpayers with a clean compliance history for FTF and FTP penalties that have been assessed. This administrative waiver is called “first-time abatement” (FTA).

Qualifying taxpayers with no penalties in the prior three years and in good standing with the IRS (they have filed all returns and do not have an outstanding balance) may request the first period penalties to be abated without providing reasonable cause.

FTA Qualification

FTA applies to specific taxpayers/returns with the circumstances described in the following table. [[IRM 20.1.1.3.3.2.1 (3-29-2023)]]

Qualifying taxpayers and returns	Individual: 1040 series Business: Form 1065 and 1120 Series Payroll: 940/941/944/945 Not applicable: event-based returns (estate, gift) and information returns (W-2s, 1099s, 3520, 5471, etc.).
Applicable penalties that can be abated	Failure to file, failure to pay, and failure to deposit (not accuracy or estimated tax penalty).
Penalty history	No penalties for the prior three years preceding the penalty year (estimated tax penalty does not disqualify for FTA). If the penalty is on a joint return, neither spouse can have a prior disqualifying penalty. Any penalties abated and coded by the IRS due to “Reasonable cause” in the prior three years should not disallow the taxpayer from FTA.
Outstanding balances	If taxpayer owes back taxes, taxpayer is in an agreement to pay and is current on payments.
Filing compliance	All required returns have been filed. According to IRM 20.1.1.3.3.2.1 at (5) (3-29-2023), the taxpayer must have filed, if required, the past three years’ returns. In the case of a married filing joint return, both the primary and secondary taxpayers must have filed their prior three years of required returns.
Amount that can be abated	There is no dollar limitation on the amount that can be abated.
How to request	Any amount can be abated in writing or by phone.
Abatement periods	First period penalties only (i.e., Form 1040 — first year).
Timing	The taxpayer must request abatement within the refund statute of limitations (that is, three years from due date of the return, or two years after the tax is paid, whichever is later).

Example: A taxpayer files his 2018 return late and owes taxes. He is assessed the FTF and FTP penalties for 2018. A review of his 2015-2017 IRS account transcript shows no disqualifying penalties (no accuracy, FTF, or FTP penalty) for those years. The taxpayer has filed all required returns and is in a payment plan for the 2018 balance in which he is up to date on the monthly payments. The taxpayer qualifies for FTA and can request abatement of the FTF and FTP penalties by contacting the IRS by phone.

Steps to Request FTA for an Individual Taxpayer

These three steps should be followed to request and confirm FTA:

Confirm that the taxpayer’s penalty qualifies for FTA

Qualifying penalty: FTF and/or FTP (for the first period only)
No penalties in prior three years (both spouses, if applicable): review IRS account transcripts and confirm no FTF, FTP, or accuracy penalties assessed on the account for the prior three years preceding the penalty year (estimated tax penalty is not a disqualifier).
All required returns are filed (generally, the past three years): confirm with IRS account transcripts that these returns have been filed.
Up to date on payments: taxpayer is in an installment agreement and current on monthly payments if he owes an outstanding balance. Extensions to pay qualify as a payment arrangement.
Statute of limitations has not expired: the penalty was for a tax period whose due date was less than three years prior to the abatement request, or within two years after payment of the abatement request date.

2. Call or write the IRS and request FTA

Contact the IRS by phone: use the IRS penalty hotline (alternatively, tax pros can use the Practitioner Priority Service hotline and a taxpayer can use the number on his or her IRS notice) and request FTA for the year with FTP/FTF penalties. If the taxpayer is assigned to a compliance unit (i.e., IRS Collection), the request must be made with the assigned unit.
Contact the IRS in writing: alternatively, the taxpayer can submit Form 843, Claim for Refund and Request for Abatement, and request FTA for the years and penalties in question.

3. Confirm the abatement was received

IRS notice: the taxpayer will receive IRS notice 853C or 3503C showing the abatement.
IRS account transcript: the transcript will show the reversal of the penalty(s) in about 2-3 weeks after the request was granted.

FTA Terms and Practice Tips

FTA terms are explained in IRM 20.1.1.3.3.2.1 (3-29-2023). Taxpayers should be aware that FTA is an administrative waiver and it is common for the IRS to make changes to FTA terms.

Some important additional terms and tips in requesting FTA:

Past estimated tax penalties do not disqualify for FTA: estimated tax penalties in the prior three years will not disqualify the taxpayer from having a “clean compliance history” and FTA qualification.
Accuracy penalties cannot be abated for FTA: taxpayers cannot request that the accuracy penalty (from an audit or CP2000 adjustment) be abated. Note that accuracy penalties assessed in the past three years prior to the FTF/FTP assessment year will disqualify the taxpayer from FTA.
Reasonable cause abatement should in prior years should not disqualify for FTA: Many reasonable cause abatements are erroneously recorded as FTA. In 2018, if the penalty qualifies for FTA, IRS procedures provided that the IRS use the taxpayer’s FTA administrative waiver in the first year even though the taxpayer qualifies for reasonable cause abatement. This will disqualify the taxpayer from using FTA for the three years following the penalty abatement year. Taxpayers who qualify for reasonable cause should make sure that the IRS codes the abatement as “reasonable cause” in the prior three years (if reasojnable cause applies) in order to qualify for FTA in the most current period. Taxpayers may have to request assistance from the Taxpayer Advocate if prior abatements were incorrectly coded as FTA rather than the appropriate reasonable cause.
Use reasonable cause for other years: taxpayers can use FTA in year one and reasonable cause in other years. The taxpayer will need to separately request reasonable cause abatement for each year using Form 843.
Can use FTA multiple times: taxpayers can use FTA every fourth year if the prior three years have no disqualifying penalties and the taxpayer is in compliance.
Can request FTA again on accrued FTP penalty: in some cases, the taxpayer will request FTA to abate initial FTF and/or FTP penalties and still have an outstanding balance owed that will accrue future FTP penalties. The taxpayer can request FTA after the final payment has been made and receive a refund for the additional accrued FTP penalties paid.
No dollar limitation: any amount of FTF and FTP penalty can be abated for FTA.
S corporation and partnership late filing penalties can use FTA: FTA is not limited to individual taxpayer FTF and FTP penalties. It is common for employers to use FTA for employment tax first period failure to deposit penalties and for S corporations and partnerships to abate first year late filing penalties.
Must request within the statute of limitations: FTA requests must be made within three years after a return was filed or two years after the return balance is paid, whichever is later. In practice, the IRS may allow abatement outside of the statute of limitations if the tax module is still active on IRS systems. In practice, the IRS may allow FTA to the taxpayer when the period does not actually qualify due to the claim for refund statute of limitations (three years after return is filed/two years after tax is paid) if the taxpayer has another balance due module. (See IRM 25.6.1.10.2.7 (6-16-2023).) However, the IRS has not been consistent with this application.
Use the phone to request: the IRS penalty hotline can screen for qualification and complete an immediate FTA for a taxpayer. Tax professionals can use the PPS line to request and receive FTA. Written requests are not required.

Reasonable Cause Abatement

Taxpayers can remove FTF and FTP penalties for cause. This relief is referred to as a “Reasonable Cause Penalty Abatement” (RC PA) request. The IRS must approve all reasonable cause abatement requests. This process can take several months to complete.

Favorable Factors for RC PA

Taxpayers requesting abatement will want to provide facts and circumstances that warrant penalty abatement for reasonable cause. In penalty abatement determinations, the IRS will consider whether the taxpayer had circumstances outside of their control that caused the noncompliance, whether they have used ordinary business care and prudence, and confirm that they did not willfully neglect their obligations. Ideally, the taxpayer’s circumstances and tax compliance history will reflect a compliant taxpayer who was not able to comply because of their unforeseen circumstances. Favorable taxpayer arguments include:

*Factor*	*Favorable Circumstances*
Isolated incident	First-time, one-time incident
Voluntary correction	Self-corrected error (voluntary compliance)
Future compliance	Compliant going forward
Timely correction	Fixed the noncompliance soon after it was found
Life affected	Other areas of taxpayer’s life/finances were affected
Reasonable cause	Good reason outside of taxpayer’s control

Taxpayers need to highlight these favorable factors when requesting penalty abatement for FTF and FTP penalties based on reasonable cause.

Reasonable Cause Factors: FTP and FTF Penalties

The IRS rules for making penalty abatement determinations for the FTF and FTP penalties are found in IRM 20.1. This section provides the reasonable cause factors IRS personnel use to approve/deny abatement relief. The IRM also provides guidance and information that IRS personnel consider in making their reasonable cause determination.

For the FTF and FTP penalties, taxpayers will usually provide one or more of these reasonable cause factors:

Reasonable cause factor

IRM citation

Important considerations

Death, Serious Illness, or Unavoidable Absence (includes mental impairment)

If there was a death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family (i.e., spouse, sibling, parents, grandparents, children).

20.1.1.3.2.2.1 (11-25-2011)

Factors to consider:

The relationship of the taxpayer to the other parties involved.
The date of death.
The dates, duration, and severity of illness.
The dates and reasons for absence.
How the event prevented compliance.
If other business obligations were impaired.
If tax duties were attended to promptly when the illness passed, or within a reasonable period of time after a death or return from an unavoidable absence.

Fire, Casualty, Natural Disaster, or Other Disturbance

Specific incident that was not classified for disaster relief but affected taxpayer’s ability to comply.

20.1.1.3.2.2.2 (10-19-2020)

Other reasonable cause factors may apply also, such as unable to access records.

Factors to consider include the following:

Timing of the incident in relation to the compliance requirement.
Effect on the taxpayer.
Effect on other areas of taxpayer’s life.
Steps taken to attempt to comply.
If the taxpayer complied when it became possible.

Unable to Obtain Records

Inability to obtain or reconstruct necessary records to comply

20.1.1.3.2.2.3 (12-11-2009)

Often used to explain reliance on a tax professional/advisor. Taxpayer will need to explain:

Why the records were needed to comply.
Why the records were unavailable and what steps were taken to secure the records.
When and how the taxpayer became aware that he or she did not have the necessary records.
If other means were explored to secure needed information.
Why the taxpayer did not estimate the information.
If the taxpayer contacted the IRS for instructions on what to do about missing information.
If the taxpayer promptly complied once the missing information was received.
Supporting documentation such as copies of letters written, and responses received in an effort to get the needed information.
Why the records could not be reconstructed (or reconstructed in time to comply).

Honest Mistake Was Made

Taxpayer made a good faith effort but made a mistake (missed filing requirements, withholding).

20.1.1.3.2.2.4 (12-11-2009)

Similar to ignorance of the law. Not a strong argument for many taxpayers as is not keeping with ordinary business care and prudence standard. The reason for the mistake may be a supporting factor if additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply within the prescribed time.

When and how the taxpayer became aware of the mistake.
The extent to which the taxpayer corrected the mistake.
The relationship between the taxpayer and the subordinate (if the taxpayer delegated the duty).
If the taxpayer took timely steps to correct the failure after it was discovered.
The supporting documentation.

Erroneous Advice or Reliance on a Tax Professional/Advisor

The taxpayer claims that he or she could not comply due to specific advice received from someone, whether orally or in writing, or the taxpayer claims he or she relied on someone else to comply on his or her behalf.Generally, this reasonable cause exceptions applies mostly to accuracy penalties.

20.1.1.3.2.2.5 (11-21-2017)

20.1.1.3.3.4.3 (11-21-2017)

Factors for erroneous advice:

Was the failure to comply due to a change in the tax law that the taxpayer could not reasonably be expected to know? Reliance on a tax professional is not a basis for reasonable cause, particularly for filing or paying obligations, since the taxpayer is responsible for meeting his or her tax obligations and that responsibility cannot be delegated.

Ignorance of the Law

Reasonable effort to comply but unaware of the law/tax law change.

20.1.1.3.2.2.6 (11-25-2011)

A tax law change or complexity that caused nonpayment or non-filing. The taxpayer must have made reasonable efforts to determine his or her tax obligations. Facts and circumstances considered:

The taxpayer’s education.
If the taxpayer has previously been subject to the tax.
If the taxpayer has been penalized before.
If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know.
The level of complexity of a tax or compliance issue.
A reasonable and good faith effort was made to comply with the law.
The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement.

Undue Hardship (failure to pay only)

Had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. §1.6161-1(b)) would have resulted.

20.1.1.3.3.3 (08-05-2014)

When did the taxpayer know he or she could not pay?
Why was the taxpayer unable to pay?
Did the taxpayer explore other means to secure the necessary funds?
What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?
Did the taxpayer pay when the funds became available?

Taxpayers should always address the important considerations for the applicable reasonable cause factor when requesting relief.

Requesting Reasonable Cause Penalty Abatement

Taxpayers requesting reasonable cause penalty abatement must do so in writing. Taxpayers can use Form 843, Claim for Refund and Request for Abatement. Alternatively, taxpayers can write a letter (not using Form 843) requesting reasonable cause abatement.

Practice Tip: Many taxpayers and tax professionals use Form 843 rather than an informal penalty abatement letter when requesting penalty abatement for an unpaid penalty because Form 843 is generally recognized by the IRS as a “claim for refund.” However, in the case of unpaid penalties, the taxpayer is not claiming a refund, but rather is requesting the penalty assessment reversal prior to payment. The Form 843 is the proper form to use when the penalty has been paid for purposes of starting a formal claim for refund. A claim for refund entitles the taxpayer to sue the IRS if it is denied or goes unanswered for six months. [[IRM 4.10.11.2.3 (9-4-2020)]] In practice, taxpayers can use either a Form 843 or an informal penalty abatement letter since the IRS currently recognizes both as penalty abatement requests. However, if the taxpayer has paid the penalty, the taxpayer should use Form 843 to request the abatement. In either case, taxpayers should always follow up with the IRS in three weeks to make sure that the IRS has received and assigned the abatement request for determination.

A penalty abatement request letter must include:

IRS address to send abatement: original FTF and FTP penalty abatement requests go to the address on the last notice received or to the IRS campus (i.e., Service Center) to which they would file a paper return.
Clear request for abatement: the taxpayer must cite the years, forms, amounts, and types of penalties in which abatement is requested. Form 843 provides for this information. IRS account transcripts will help provide the amounts of assessed penalties. Taxpayers with unpaid balances should request that all future accruals of the FTP penalty be suppressed if the taxpayer’s circumstances still exist. [[IRM 20.1.2.2.4.1 at (9) (07-18-2016)]]
Taxpayer information: the taxpayer name, address, taxpayer identification number, and contact information. The Form 843 will include this information.
Reasonable cause argument and attachments to support the argument: in the body of the letter or attachment to Form 843, the taxpayer should outline the facts and circumstances that warrant penalty abatement. The taxpayer should also include supporting documentation to substantiate these arguments.
Taxpayer attestation and signature: the taxpayer will need to attest to claimed facts and circumstances. Form 843 provides for such attestation. If the taxpayer is using a separate penalty abatement request letter, the taxpayer will need to provide the following statement: “Under penalties of perjury, I declare that I have examined this claim, including accompanying schedules and statements, and, to the best of my knowledge and belief, it is true, correct, and complete.” The taxpayer(s) must sign and date the request.

Practice Tip: The IRS does allow taxpayers to request both reasonable cause and FTA penalty abatement by phone. All FTA requests, regardless of the amount, can be made successfully by phone. However, reasonable cause abatements by phone are limited to small amounts (these amounts are not published by the IRS, but are generally in the “hundreds of dollars,” not in the “thousands”). In addition, most oral requests for penalty abatement are not successful as the IRS usually requires additional documentation during the call or outright denies abatement. The best practice is to request all reasonable cause abatements in writing.

Reasonable Cause Critical Elements and Substantiation

Taxpayers must provide sufficient information in their request to show reasonable cause. The taxpayer must address these three elements of reasonable cause:

They used ordinary business care and prudence.

The taxpayer was reasonable in their attempts and efforts to comply (no willful blindness to the rules).
The taxpayer corrected the noncompliance immediately after the circumstances that caused them not to comply ended.
The taxpayer made efforts to prevent future noncompliance (hired a tax professional, etc.).
They are a compliant taxpayer.
- Currently in compliance (filing, payment, etc.).
- Good voluntary compliance history (complied with IRS enforcement or prompted by IRS notice/letter).

2. They had unforeseen circumstances outside of their control that did not allow them to comply, i.e., they had a reason (reasonable cause) for noncomplying.

The circumstances must have been unforeseen.
Consideration is given to whether the taxpayer could have anticipated the event that caused the noncompliance.

3. The taxpayer has evidence to support their reasonable cause.

Chronology of events and timing that support the period of noncompliance due to the circumstances outside of his or her control.
List of other aspects of the taxpayer’s life that were affected as a result of the taxpayer’s unforeseen circumstances. In the case of hardships, it is important to illustrate that the taxpayer’s tax obligations were not the only aspect of the taxpayer’s life that were affected (i.e., he or she could not work, pay bills, etc.).
Third-party evidence to support the circumstances and timeframes.

Requesting Reasonable Cause Abatement While a Taxpayer Is in IRS Collection

Taxpayers who owe the IRS and are in IRS collection may have the opportunity to request penalty abatement during a Collection Due Process hearing (CDP). Taxpayers who meet the conditions (levy notice or lien filing) to file a CDP (or Equivalent Hearing) may request penalty abatement by timely filing Form 12153, Request for a Collection Due Process or Equivalent Hearing, with IRS Collections. Taxpayers can select “other” as a collection reason in section 8 of Form 12153 and provide penalty abatement as the reason. The taxpayer will attach his or her penalty abatement request letter/substantiation to the Form 12153 when filing.

Practice Tip: When available, taxpayers often prefer to use a CDP hearing to request reasonable cause penalty abatement for the FTF and FTP penalties rather than requesting abatement through an informal letter request. Resolving penalties through CDP hearings are usually much quicker than other methods and route the request directly to an experienced IRS person in the IRS Independent Office of Appeals. CDP hearings for penalty abatement are usually heard within 3-4 months, much quicker than Form 843/penalty abatement letter original request determination and any subsequent appeals request. In addition, CDP hearings are subject to further judicial review. As such, the IRS tends to look closer at the taxpayer’s circumstances and is more likely to carefully consider all the facts and circumstances that warrant abatement.

Taxpayers are unable to use the informal Collection Appeals Program to request penalty abatement. [[IRM 5.1.9.4.1 (8-27-2021)]]

IRS Abatement Determinations

IRS personnel use the “Reasonable Cause Assistant” (RCA) automated tool to make penalty abatement determinations for FTF and FTP penalties. The tool allows IRS personnel to evaluate the taxpayer’s specific reasonable cause arguments. The RCA often mistakenly denies penalty abatement and the tool has come under much scrutiny from the Treasury Inspector General for Tax Administration (TIGTA) [TIGTA Report, Penalty Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage Voluntary Compliance, September 19, 2012] and the National Taxpayer Advocate because of its inflexible and often incorrect determinations.

Practice Tip: Taxpayers can request that the IRS representative override the RCA tool when it appears that the IRS automated decision tool is not considering the totality of their circumstances. However, in practice, the IRS will often request the taxpayer to appeal the determination rather than override the RCA determination.

Taxpayers should always be prepared to request an appeal of adverse penalty abatement circumstances. It is common for the IRS to make errors in initial abatement determinations and an IRS appeal will allow the taxpayer to present his or her facts and argument to a person who is able to independently make a determination based on all of the taxpayer’s facts and circumstances.

Steps to Request FTF and FTP Penalty Abatement

To request abatement, taxpayers need to follow the following eight steps:

Determine the penalties that qualify for abatement: identify and quantify the penalty(s) and amount(s) that are assessed and whether the time period to request abatement has expired (three years after the return is filed or two years after the balance is paid).
Confirm filing and payment compliance: all required returns need to be filed (returns for the last six years for reasonable cause; returns for the last three years if using FTA for abatement) to show good compliance and qualify for FTA (if applicable). If the taxpayer owes back taxes, he will need to be in a payment plan and current on monthly payments. An extension to pay agreement qualifies as payment compliance.
Determine which penalty abatement relief option applies to each penalty: two options usually apply: first-time abatement or reasonable cause. Review IRS account transcripts to determine if the taxpayer qualifies for FTA. If the taxpayer needs to argue reasonable cause, evaluate reasonable cause factors for qualification.
Determine proper venue to request abatement: if the balance is paid or the taxpayer is in an agreement to pay, the request may go to the IRS campus (for FTA, the taxpayer can call the number on their last notice and tax professionals can call the Practitioner Priority Service hotline). If the taxpayer qualifies for a Collection Due Process hearing (lien or levy notice) and has not argued the penalty with IRS appeals in the past, they can request penalty abatement in the CDP hearing.
Prepare the penalty abatement request package: prepare the request using Form 843 with the critical reasonable cause elements and substantiation therefor. Make a copy of the request for later reference in discussions with the IRS.
Contact the IRS/submit the PA request: reasonable cause is requested in mail and FTA by phone. Send the reasonable cause request certified mail to the IRS.
Confirm receipt and timely respond to requests for additional information: the taxpayer should confirm that the IRS has received the request 3-6 weeks after mailing. Taxpayers should monitor IRS mail and timely respond to any additional requests for information.
Get the initial determination: review the initial determination. If approval is granted, confirm that the abatement amount(s) are correct. If denied, review the denial determination for accuracy and consider IRS appeal if not in agreement.
Appeal adverse determination: complete an appeal petition and send it to the appropriate address on the denial notice. Respond timely to the appeals officer to requests for additional explanations and information. Finalize the appeal determination and abatement amounts.

Appealing Adverse Penalty Abatement Determinations

Many initial determinations are denied and require that the taxpayer appeal the determination with the IRS Independent Office of Appeals. If the taxpayer’s request is denied, they have a right to appeal the determination.

Taxpayers who qualify may use one or more of the following appeals procedures:

IRS Service Center appeal: a hearing with the IRS Independent Office of Appeals for a penalty abatement denial by an IRS campus function.
IRS Collection Due Process (CDP) hearing: appeals hearing due to a lien filing or levy notice which also allows the taxpayer to contest penalties. This venue is often used to initially request penalty abatement for taxpayers in IRS Collection who have received a levy or lien notice.
Claim for refund appeal procedures: an appeal to the U.S. District Court or Court of Claims when the IRS denies a claim for refund of a penalty that has been paid.

Practice Tip: Most penalty abatement appeals are Service Center or CDP appeals. Filing an appeal with the U.S. District Court/Court of Claims is not a practical remedy for most penalty appeals. CDP hearings can be used to request penalty abatement if the taxpayer has an adverse collection action (lien or levy). However, if penalty abatement has been denied by IRS appeals in the past, the IRS will often not allow the taxpayer to argue penalty abatement in a CDP hearing. [[IRM 20.1.1.4.1.1 at (2) (10-19-2020)]]

Appeals Request

To request an appeal, the taxpayer must prepare an appeals protest consisting of the following:

Protest letter: a letter clearly requesting an appeal of the penalty abatement determination that outlines any additional arguments and evidence that proves reasonable cause. The protest letter must also directly address the IRS denial reasons in the determination letter.
Denial determination letter: a copy of the denial letter stating the reasons for denial.
Additional facts and evidence: any additional documentation and supporting evidence not previously considered.
A copy of the previous request: the original penalty abatement request (this may be an original request in the case of a CDP appeal).
A signed declaration attesting to the facts presented: taxpayer must sign the protest with the statement: “Under penalty of perjury, I declare that I examined the facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct and complete.”

Sending the Appeals Request

The taxpayer should send the appeals request by certified mail in order to have a record of receipt of the request.

The Service Center appeal will be sent to the Service Center Penalty Appeals Coordinator listed on the denial notice. The denial notice states that the taxpayer has 60 days to appeal. However, in practice, all subsequent appeals requests are allowed by the IRS regardless of the response date. Once an appeals hearing is scheduled, the taxpayer will receive a phone call and/or letter notifying the taxpayer of the hearing date. The hearings are usually by phone and are scheduled about 6-12 months after the request is submitted, depending on IRS resources available to hear the appeal.

Practice Tip: Penalty appeals requests are often misrouted at the IRS. Taxpayers should contact the IRS 3-6 weeks after the request is submitted to confirm receipt. The IRS scans the penalty abatement request into its Correspondence Imaging System so it can be seen by IRS representatives. If the IRS does not send a confirmation letter confirming the receipt of the request (often the IRS does not send a notice unless they are experiencing delays in scheduling the hearing) or does not schedule the hearing within three months, the taxpayer should follow up with the Accounts hotline, Appeals hotline, and/or the Taxpayer Advocate to ensure that the appeal is scheduled. Tax professionals can contact the PPS hotline to confirm receipt and assignment.

Penalty Appeals Determinations

Appeals will make a final determination based on the facts and circumstances of each case. Appeals has the ability to fully allow, fully deny, or partially allow the abatement. Service Center decisions are communicated to the taxpayer by phone and by a follow up decision letter. CDP hearing decisions are also communicated to the taxpayer by phone, but the taxpayer will receive a formal determination letter which provides the taxpayer the opportunity to appeal an adverse decision to the U.S. Tax Court.

Service Center determinations may not be appealed to the U.S. Tax Court. Taxpayers who wish to contest the adverse appeal determination in the courts must follow a claim for refund procedures. This requires that the taxpayer pay the penalty and file for a claim for refund. If the IRS denies a claim for refund, the taxpayer can take the case to court after receiving the IRS’s claim for refund denial letter, called a Notice of Claim Disallowance. If the IRS does not issue a formal Notice of Claim Disallowance, the taxpayer may file suit six months after filing the claim for refund. There is a time limit if the IRS does issue a Notice of Claim Disallowance. The taxpayer has two years from the date of the formal Notice to bring suit in U.S. District Court or the U.S. Court of Claims. [IRC §6514]

The IRS provides in Publication 4576, Penalty Appeals: Orientation to the Penalty Appeals Process, information to taxpayers on what to expect in a penalty abatement appeal. Most penalty abatement appeals are routed to IRS appeals officers located in the IRS Ogden, Utah IRS campus appeals office.

Taxpayers who file late international information returns (i.e., Forms 3520, 5471, etc.) that are required to be attached to their income tax return are subject to stringent and expensive IRS penalties. These taxpayers do not qualify for FTA but are able to have their penalties abated for reasonable cause.

Taxpayers who file late income tax returns with attached international information statements (such as Form 3520) are automatically assessed the applicable late filing penalty. The IRS issues Letter CP15 to assess these penalties. [IRM 20.1.9.3.2 (11-30-2015)] Taxpayers will need to request reasonable cause abatement to remove these penalties. Taxpayers must have filed all required returns before requesting penalty abatement for late filing of any international information returns. For specific rules for each type of international information return penalty, see IRM 20.1.9.

Taxpayers subject to delinquent international information return penalties can request reasonable cause abatement under the IRS’s Delinquent International Information Return Submission Procedures if they:

have filed one or more delinquent required international information returns,
have reasonable cause for not timely filing the information returns,
are not under a civil examination or a criminal investigation by the IRS, and
have not already been contacted by the IRS about the delinquent information returns.

The IRS regularly posts updates to its international information return penalties at Deliquent Internation Information Return Submission Procedures.

In practice, the IRS often abates the information return penalty if there is no tax liability associated with the delinquent filing of the international return and the taxpayer has reasonable cause for the late filing. It also helps if it is the taxpayer’s first instance of noncompliance. Taxpayers can request abatement after the penalty is assessed or non-assertion of the penalty at the time of filing using these procedures.

Practice Tip: Although FTA does not apply to related late filing of international information returns, the IRS often allows taxpayers a first-year abatement if the taxpayer’s primary return qualifies for FTA. Taxpayers who make inadvertent errors in late filing international information returns should highlight their clean compliance history when advocating for penalty abatement. [IRM 20.1.9.3.5 (1-29-2021)] Taxpayers should be prepared for a lengthy time for an IRS determination and should be prepared to appeal the penalty request. It is not uncommon for international information return penalty requests, including appeals, to take a year or more to conclude.

The IRS assesses most of the international information penalties on a separate penalty tax module, different from the primary income tax return. Taxpayers will need to request their “civil penalty” transcript for the years in question to identify the penalty assessment and amount. IRS procedures require an IRS manager’s approval of the penalty prior to assessment. [IRM 20.1.9.2 at (20) (1-29-2021)] Taxpayers usually receive IRS Letter CP15 that provides the amount and computation of the penalty assessed. [IRM 20.1.9.3.2 (11-30-2015)]

Practice Tip: Tax professionals representing taxpayers with international information return penalties need to add “Civil penalty” as the type of tax with the appropriate Form number (i.e., 3520, 5471, etc.) to their Form 2848 to have authority to get information and advocate for the removal of these assessed penalties.

Taxpayers should submit a reasonable cause abatement request similar to the format of the FTF/FTP penalty abatement request. These requests must be made in writing and sent to the address on the CP15 notice. The IRS organization unit that assessed the penalty is responsible for the abatement determination. [IRM 20.1.9.2.4 (1-29-2021)]

Late filed international information return penalty abatement denials are subject to appeal. Taxpayers may appeal to the organizational unit making the determination, or use the Service Center appeal and, if applicable, the Collection Due Process appeal.

Example: FTF and FTP Reasonable Cause Abatement Request

Example: Jeremy Andrews filed and paid his 2017 return late due to a long-term illness that rendered him incapacitated and without funds to pay his taxes. He has paid the tax, but not the penalty. His penalty abatement request includes:

Form 843, Claim for Refund and Request for Abatement.
Attachment to Form 843, Request to Waive Penalties for Reasonable Cause, that outlines his facts, reasonable cause argument, and evidence to support his argument.
Supporting evidence (documents not shown in the example below).

This section covers how to dispute the accuracy penalty in an IRS audit or underreporter notice.

Topic	Covers
Overview of Accuracy-Related Penalties	How the IRS assesses the accuracy penalty and basic accuracy penalty rules.
Accuracy Penalties: Negligence/Disregard and Substantial Understatement	The rules for the accuracy penalty for negligence/disregard and substantial understatement.
Reasonable Cause Exception for Accuracy Penalties	How to dispute the accuracy penalty due to reasonable cause.
Contesting the Accuracy Penalty During the Audit or CP2000 Notice	How to contest the accuracy penalty in an audit or underreporter notice.
Abatement After Assessment: Reconsideration	How to contest an assessed accuracy penalty through audit or CP2000 reconsideration.

Other helpful sections:

Topic	Covers
Automated Underreporter (CP2000) Notices	How to contest the accuracy penalty in an underreporter (CP2000) notice.
IRS Correspondence (Mail) Audits	How to contest the accuracy penalty in a mail audit.
IRS Office and Field Audits	How to contest the accuracy penalty in a face-to-face audit (office or field audit).

Key Highlights:

Taxpayers can be subject to an additional accuracy penalty if they do not correctly file and report items on their tax return.
There are several types of accuracy penalties, but the most commonly asserted accuracy penalties are for negligence/disregard of the rules and regulations and for substantial understatement of tax. Both of these penalties are 20% penalties.
Accuracy-related penalties are always asserted during a deficiency proceeding, such as an audit or a CP2000 underreporter notice. Taxpayers should contest accuracy penalties is during the deficiency proceeding, including appealing the penalty before it is assessed.
Taxpayers can use a “reasonable cause” argument to contest accuracy penalties. The most important factor in determining reasonable cause is the taxpayer’s effort to report the proper tax liability. Other factors that are considered are the taxpayer’s experience, knowledge, education, and his or her reliance on the advice of a tax advisor.

The purpose of accuracy-related penalties is to deter tax return accuracy noncompliance. Internal Revenue Code (IRC) sections 6662(b)(1) and (2) authorize the IRS to impose a penalty if a taxpayer’s negligence or disregard of rules or regulations caused an underpayment of tax or, if an underpayment exceeded a computational threshold called a substantial understatement. IRC §6662 specifies six other types of accuracy-related penalties. However, these penalties are rare and beyond the scope of this discussion.

Ultimately, in court, the burden of proof to assert an accuracy penalty is on the IRS. [IRM 4.10.7.6 (1-1-2006) and IRC §7491] However, once the IRS provides evidence that the penalty is warranted, the burden of proof generally shifts to the taxpayer to establish any exception to the penalty, such as reasonable cause. [IRM 4.10.7.6.3 (9-12-2022)] The amount of accuracy-related penalty is 20% of the portion of the underpayment attributable to the taxpayer’s negligence or disregard of the rules or regulations or to a substantial understatement.

The accuracy-related penalty applies if the taxpayer did not make an honest effort to file an accurate tax return. Taxpayers are not subject to the accuracy-related penalty if they are able to establish that they had reasonable cause for the underpayment and acted in good faith to properly report their tax liability.

Some basic accuracy penalty rules:

The likely origin of the accuracy penalty is a CP2000 or an audit: accuracy penalties are proposed when the accuracy of the return is questioned, that is, during an audit or an underreporter notice (CP2000).
Can only be assessed on a filed return: if the IRS enforces non-filing by filing a return for the taxpayer (called a “substitute for return” or “SFR”), the IRS is unable to assert an accuracy penalty. Subsequent returns filed to replace the SFR are subject to audit and the assessment of an accuracy penalty. [IRM 20.1.5.3.2 (4-22-2019)]
Cannot stack penalties: the IRS may not “stack” both the negligence and substantial understatement to the same assessment. The IRS may propose “alternative” positions that would have a portion of the additional tax subject to substantial understatement with a secondary position that if substantial understatement is not sustained, the negligence penalty would apply. [IRM 20.1.5.3.3.1 (8-31-2021)]
Taxpayer should contest during the deficiency proceeding: the best practice is to contest an accuracy penalty during the audit or CP2000 response before the penalty is assessed. Once the penalty is assessed, the taxpayer has limited options for abatement.
Manager must timely approve accuracy penalties in an audit in writing: IRC §6751(b) requires an IRS manager to document concurrence with a penalty assessed in an audit. Written supervisory approval is required prior to issung any written communication of penalties to a taxpayer. [IRM 20.1.5.2.3 (2-28-2025) and IRM 20.1.1.2.3.1 (10-18-2020)]

Practice Tip: Recently, there have been many taxpayer disputes regarding whether a manager has timely approved and documented in writing their approval for accuracy penalties assessed in an audit. Taxpayers may consider requesting abatement of accuracy penalties assessed in an audit if the IRS did not meet the obligations for the manager documented concurrence.

CP2000 accuracy penalties are assessed automatically by IRS computers: when a taxpayer receives a CP2000 automated underreporter notice, accuracy penalties are proposed based on IRS automated business rules. [IRM 4.19.3.18.6 (5-19-2017)] If the taxpayer has had a prior CP2000, then the CP2000 notice will automatically assess the accuracy penalty for negligence. If the taxpayer meets the substantial understatement computational requirements, the accuracy penalty for substantial understatement is proposed on the notice. In mail audits where the taxpayer does not respond to the request for information, IRS computers also automatically assess an accuracy penalty for substantial understatement if the penalty computation requirements are met. [IRM 20.1.5.2.3 at (6a) (2-28-2025)]
Manager must approve accuracy penalties if they are contested in a CP2000 response: initial underreporter notices with accuracy penalties do not require a manager’s approval. However, if the taxpayer responds to the notice contesting the penalty, an IRS manager must review, approve, and document their concurrence with the assessed accuracy penalties. [IRM 20.1.5.2.3 at (6b) (2-28-2025)]

Identifying Accuracy Penalties

Proposed accuracy penalties are found on IRS Examination (audit) reports and CP2000 notices. For example, in an IRS audit, the taxpayer will receive Form 4549, Income Tax Examination Changes. An example appears below.

Page 1 of the CP2000 notice shows the proposed accuracy penalty. See below.

Assessed accuracy penalties are shown on IRS account transcripts with a transaction code 240. See below.

Accuracy Penalties: Negligence/Disregard and Substantial Understatement

The two most likely accuracy-related penalties that are assessed are:

Section 6662(b)(1): Negligence or disregard of rules or regulations: negligence includes any failure to make a reasonable attempt to comply. Disregard includes any careless, reckless, or intentional disregard of the rules and regulations.
Section 6662(b)(2): Any substantial understatement of income tax: for individuals an understatement of income tax exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000. The penalty does not apply to the amount of the understatement where the taxpayer has substantial authority for the treatment/reporting of the item or if the understated item is adequately disclosed on the return and there is a reasonable basis for the tax treatment.

Each of these penalties add to the tax an amount equal to 20% of the portion of the underpayment to which the penalty applies. For example, if the taxpayer owes an additional $10,000 in an audit and the entire adjustment is due to negligence, the accuracy penalty assessed would be $2,000.

What Is Negligence?

Negligence includes any failure to make a reasonable attempt to comply with the provisions of the tax law, to exercise ordinary and reasonable care in tax return preparation, and to keep adequate books and records.

In audits, some indications of negligence recognized by the IRS include: [IRM 20.1.5.8.1 (12-13-2016)]

Unreported or understated income.
Significantly overstated deductions or credits.
Careless, improper, or exaggerated deductions.
Misrepresented or miscategorized deductions in such a manner as to conceal the true nature of the deduction.
Unexplainable items.
Inadequate books and records.
Cooperative state programs and state reports showing a negligence penalty (considering other factors and not relying entirely on the findings of the taxing agency).
Substantial errors on an issue that had been adjusted in a prior year.
Incorrect or incomplete information provided to the return preparer for preparation of the tax returns.

The penalty for negligence does not apply if the taxpayer’s position has a reasonable basis.

For CP2000 underreporter notices, the IRS does not specifically inquire about the taxpayer’s circumstances and attempt to comply. CP2000 notices automatically assesses the negligence penalty if the taxpayer has received a prior CP2000 notice and the same type of income was not reported as in the prior CP2000 notice. [IRM 4.19.3.18.6 at (1) (5-19-2017)]

What Is Intentional Disregard of Rules and Regulations?

Disregard of the rules and regulations includes careless, reckless, or intentional disregard. Each is defined as follows: [IRM 20.1.5.8.2 (4-22-2019)]

Careless: the taxpayer does not exercise reasonable care to determine the correctness of a tax return position that is contrary to the rule or regulation.
Reckless: the taxpayer makes little or no effort to determine if a rule or regulation exists, under circumstances demonstrating a substantial deviation from a reasonable standard of conduct.
Intentional: the taxpayer knows of a rule or regulation and ignores that rule or regulation.

A taxpayer may not avoid a penalty for disregard of rules and regulations if she takes a position that does not have realistic possibility of being sustained on its merits.

If the taxpayer makes an adequate disclosure of his tax return position, he may avoid the penalty attributable to disregard of rules or regulations (individual taxpayers generally use Form 8275, Disclosure Statement, to disclosure their tax return position). The challenge to the validity rule/regulation must be in good faith. This requires a disclosure of the analysis of the authorities that the taxpayer reasonably relied upon in taking his tax return position. [IRM 20.1.5.8.2.1 (2-28-2025)]

Exceptions to the Accuracy Penalty for Negligence/Disregard of Rules and Regulations

IRC §6664(c) provides a reasonable cause exception to the penalties under IRC §6662 when the taxpayer has reasonable cause and the taxpayer acted in good faith.

What Is Substantial Understatement?

The substantial understatement penalty under IRC §6662(b)(2) is limited to understatements of income tax. An understatement is the excess of the amount of tax required to be shown on the return over the amount of tax imposed on the filed tax return (less any rebates).

For individuals, an understatement is substantial if it exceeds the greater of 10% of the tax required to be shown on the return for a taxable year or $5,000. The Tax Cuts and Jobs Act added IRC §6662(d)(1)(C), which provides a special rule for any taxpayer claiming the qualified business income deduction under IRC §199A. For taxable years beginning after December 31, 2017, for any taxpayer claiming a deduction under IRC §199A, an understatement is substantial if it exceeds the greater of 5% of the tax required to be shown on the return or $5,000.

Exceptions to the Substantial Understatement Penalty

There are three primary exceptions to the substantial understatement penalty:

Section 6662(d)(2)(B)(i) – Substantial authority: at the time the return is filed or on the last day of the tax year, the taxpayer has substantial authority for the tax treatment of an item. There is substantial authority if the weight of the authorities supporting the treatment of the item in question is substantial in relation to the weight of the authorities supporting the contrary treatment. IRM Exhibit 20.1.5-6 and Treasury Regulation §1.6662-4(d) provide information regarding supporting authorities. [IRM 20.1.5.9.1.1 (12-13-2016)]
Section 6662(d)(2)(B)(ii) – Adequate disclosure and reasonable basis for tax treatment: the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return and there is a reasonable basis for the tax treatment of the item. An annual Revenue Procedure is published that provides guidance as to what constitutes adequate disclosure in order to avoid the substantial understatement penalty. [IRM 20.1.5.9.1.2 (2-28-2025)]
Section 6664(c)(1) – Reasonable cause and acted in good faith: similar to the reasonable cause exception for negligence and intentional disregard of rules and regulations – that is, the taxpayer’s effort to report the proper tax liability. [IRM 20.1.5.7.1 (2-28-2025)]

Practice Tip: Most accuracy penalties are proposed in the most common IRS return challenge: the CP2000 notice. CP2000s report omitted items of income from Forms W-2/1099, etc. As a practical matter, taxpayers often argue the reasonable cause exception for omitting the item. Substantial authority or adequate disclosure/reasonable basis exceptions do not generally apply to omitted items of income on a return.

Fraud Penalty

Internal Revenue Code section 6663 imposes a 75% civil penalty for the portion of an underpayment that is due to fraud. The IRS bears the burden of proof in proving fraud. [IRM 25.1.1.3.1 (4-22-2021)] There are also criminal penalties for fraud and taxpayers may be subject to both civil and criminal fraud penalties in the same tax year. Internal Revenue Manual section 25.1 (the IRS’s “Fraud Handbook”) provides guidance to IRS employees on fraud procedures.

Fraud is defined as the intent to evade tax. Intent is distinguished from inadvertence, reliance on incorrect advice, honest difference of opinion, negligence, or carelessness. Fraud evidence involves proving that the taxpayer used deception, misrepresentation of material facts, false or altered documents, evasion, and/or conspiracy in an attempt to evade tax.

Fraud penalties are proposed in IRS audits. IRS auditors look to these fraud indicators when determining whether to propose the fraud penalty: [IRM 25.1.2.3 (11-3-2023)]

Indicators of Fraud—Income

Omitting specific items where similar items are included.
Omitting entire sources of income.
Failing to report or explain substantial amounts of income identified as received.
Inability to explain substantial increases in net worth, especially over a period of years.
Substantial personal expenditures exceeding reported resources.
Inability to explain sources of bank deposits substantially exceeding reported income.
Concealing domestic or foreign bank accounts, brokerage accounts, digital assets such as virtual currency or other property.
Inadequately explaining dealings in large sums of currency, or the unexplained expenditure of currency.
Consistent concealment of unexplained currency, especially in a business not routinely requiring large cash transactions.
Failing to deposit receipts in a business account, contrary to established practices.
Failing to file a tax return, especially for a period of several years, despite evidence of receipt of substantial amounts of taxable income.
Cashing checks, representing income, at check cashing services and at banks where the taxpayer does not maintain an account.
Concealing sources of receipts by false description of the source(s) of disclosed income, and/or nontaxable receipts.

Indicators of Fraud—Expenses or Deductions

Claiming fictitious or substantially overstated deductions.
Claiming substantial business expense deductions for personal expenditures.
Claiming dependency exemptions for nonexistent, deceased, or self-supporting persons. Providing false or altered documents, such as birth certificates, lease documents, school/medical records, for the purpose of claiming the education credit, additional child tax credit, earned income tax credit (EITC), or other refundable credits.
Disguising trust fund loans as expenses or deductions.

Indicators of Fraud—Books and Records

Multiple sets of books or no records.
Failure to keep adequate records, concealment of records, or refusal to make records available.
False entries, or alterations made on the books and records; back-dated or post-dated documents; false invoices, false applications, false statements, or other false documents or applications.
Invoices are irregularly numbered, unnumbered or altered.
Checks made payable to third parties that are endorsed back to the taxpayer. Checks made payable to vendors and other business payees that are cashed by the taxpayer.
Variances between treatment of questionable items as reflected on the tax return, and representations within the books.
Intentional under- or over-footing of columns in journal or ledger.
Amounts on tax return not in agreement with amounts in books.
Amounts posted to ledger accounts not in agreement with source books or records.
Journalizing questionable items out of correct account.
Recording income items in suspense or asset accounts.
False receipts to donors by exempt organizations.

Indicators of Fraud—Allocations of Income

Distribution of profits to fictitious partners.
Inclusion of income or deductions in the tax return of a related taxpayer, when tax rate differences are a factor.

Indicators of Fraud—Conduct of Taxpayer

False statement about a material fact pertaining to the examination.
Attempt to hinder or obstruct the examination. For example, failure to answer questions; repeated cancelled or rescheduled appointments; refusal to provide records; threatening potential witnesses, including the examiner; or assaulting the examiner.
Failure to follow the advice of accountant, attorney or return preparer.
Failure to make full disclosure of relevant facts to the accountant, attorney or return preparer.
The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the tax returns.
Testimony of employees concerning irregular business practices by the taxpayer.
Destruction of books and records, especially if just after examination was started.
Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials or trustees.
Pattern of consistent failure over several years to report income fully.
Proof that the tax return was incorrect to such an extent and in respect to items of such magnitude and character as to compel the conclusion that the falsity was known and deliberate.
Payment of improper expenses by or for officials or trustees.
Willful and intentional failure to execute pension plan amendments.
Backdated applications and related documents.
False statements on Tax Exempt/Government Entity (TE/GE) determination letter applications.
Use of false social security numbers.
Submission of false Form W-4.
Submission of a false affidavit.
Attempt to bribe the examiner.
Submission of tax returns with false claims of withholding (Form 1099-OID, Form W-2) or refundable credits (Form 4136, Form 2439) resulting in a substantial refund.
Intentional submission of a bad check resulting in erroneous refunds and releases of liens.
Submission of false Form W-7 information to secure Individual Taxpayer Identification Number (ITIN) for self and dependents.

Indicators of Fraud—Methods of Concealment

Inadequacy of consideration.
Insolvency of transferor.
Asset ownership placed in other names.
Transfer of all or nearly all of debtor’s property.
Close relationship between parties to the transfer.
Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.
A concealed interest in the property transferred.
Transaction not in the usual course of business.
Retention of possession or continued use of asset.
Transactions surrounded by secrecy.
False entries in books of transferor or transferee.
Unusual disposition of the consideration received for the property.
Use of secret bank accounts for income.
Deposits into bank accounts under nominee names.
Conduct of business transactions in false names.

IRS auditors do not have the sole authority to assess the civil fraud penalty. Auditors must confer with their manager and the IRS’s internal Fraud Technical Advisor before proposing the civil fraud penalty. [IRM 25.1.6.2 (6-10-2021)] For criminal fraud prosecution, the IRS auditor must confer with the IRS Criminal Investigation division. Criminal investigations are conducted by IRS Special Agents and not IRS auditors that are assigned to civil examinations. [IRM 25.1.3.3 (11-17-2023)]

Practice Tip: It is essential to involve a tax attorney when there is suspicion that the IRS is proposing fraud during an audit. Taxpayers should look for indications that the IRS is pursuing fraud in an audit because the IRS will not announce when the auditor is making a fraud referral to IRS Criminal Investigation. If the taxpayer suspects potential criminal investigation, he should quickly consult with a qualified attorney. A possible indication that a criminal investigation is being pursued by the auditor is when fraud indicators exist, and the IRS audit goes idle without adequate explanation or contact for a long period of time. [IRM 25.1.3.3 (11-17-2023)].

Reasonable Cause Exception for Accuracy Penalties

The most commonly argued exception to accuracy penalties is reasonable cause. The litmus test is whether the taxpayer made an honest attempt to file an accurate tax return. The most important factors in determining whether the taxpayer tried to comply are: [IRM 20.1.5.7.1 (2-28-2025)]

Level of effort to report the proper tax liability.
The taxpayer’s experience.
The taxpayer’s knowledge, sophistication, and education.
The taxpayer’s reasonable reliance on the advice of a tax advisor.

Level of Effort

The extent of the taxpayer’s effort to report the proper tax liability is the most important factor in determining reasonable cause. Reliance on information statements and isolated computational or transcription errors may indicate that the taxpayer acted reasonably and in good faith. [IRM 20.1.5.7.2 (7-1-2008)]

Taxpayer’s Experience, Knowledge, and Education

The taxpayer’s level of experience, sophistication, and education are relevant in determining whether the taxpayer acted with reasonable cause and good faith. Taxpayers with little experience, knowledge, and education may suggest an honest misunderstanding of the facts and law associated with proper reporting of the tax liability. The taxpayer’s mental and physical condition, as well as her sophistication with the tax laws at the time of filing the return is relevant in determining reasonable cause. [IRM 20.1.5.7.3 (7-1-2008)]

Reliance on Advice of a Tax Advisor

Taxpayers often rely on the advice of a tax advisor in properly reporting their tax liability. The reliance must be reasonable based on the taxpayer’s facts and circumstances. The advisor must be qualified (have expertise) and be objective (not have any conflict of interest) in making the determination.

To demonstrate reasonable cause based on the reliance on an advisor, the taxpayer must show the following: [Neonatology Associates, P.A., 115 T.C. 43 (2000)]

the advisor was competent and had expertise to justify the reliance,
the taxpayer provided necessary and accurate information to the advisor, and
the taxpayer relied in good faith on the advice of the advisor.

The Internal Revenue Manual provides its auditors additional guidance requiring them to determine that the advice was not based on unreasonable factual or legal assumptions and that there was no unreasonable reliance on the representations, statements, findings, or agreements of the taxpayer or any other person. [IRM 20.1.5.7.4 at (2) (2-28-2025)] For example, it must be shown that the advice was not based on a representation or assumption which the taxpayer knew, or had reason to know, was unlikely to be true, such as an inaccurate representation or assumption as to the taxpayer’s purposes for entering into a transaction or for structuring a transaction in a particular manner.

IRS Guidance on Determining Reasonable Cause

IRM Exhibit 20.1.5-6 provides IRS personnel and taxpayers guidance on circumstances that indicate that the taxpayer may/may not have reasonable cause/made a good faith effort to properly report the proper tax liability.

Circumstances that may indicate reasonable cause and good faith:	*Circumstances that may not* indicate reasonable cause and good faith:**
Honest misunderstanding of fact or law that is reasonable given the experience, knowledge, sophistication and education of the taxpayer.	Lack of significant business purpose.
An isolated computational or transcription error.	Reliance on advice of a tax advisor or appraiser who the taxpayer knows or should have known lacked sufficient expertise or lacked independence.
Reliance on erroneous information reported on Forms W-2, 1099, etc., provided that the taxpayer did not know or have reason to know that the information was incorrect.	Taxpayer agreed with the organizer or promoter of a tax shelter that the taxpayer would protect the confidentiality of the tax aspects of the structure of the tax shelter.
Reliance on advice of a tax advisor or appraiser who does not suffer from a conflict of interest or lack of expertise.	Claimed tax benefits are unreasonable in comparison to the taxpayer’s investment in the tax shelter.
Reliance on erroneous information (e.g., cost or adjusted basis of property, or amount of opening or closing inventory) inadvertently included in data furnished by a corporation with multiple divisions or in financial books and records prepared by those divisions, provided the corporation employs internal controls or procedures aimed at identifying such factual errors.	Nondisclosure of a reportable transaction.

Contesting the Accuracy Penalty During the Audit or CP2000 Notice

Accuracy penalties should be contested before the penalty is assessed – that is, when the penalty is proposed during the audit or CP2000 notice. [IRM 20.1.5.3.2 at (10) (4-22-2019)]

To contest the accuracy penalty, the taxpayer will need to provide their understanding of the facts and provide their argument, based on the applicable law, in response to the IRS audit/CP2000 notice.

Contesting During an Audit

In an audit, the taxpayer should first contest the penalty with the IRS auditor (revenue agent, tax compliance officer, tax examiner) proposing the penalty. The IRS auditor will propose the penalty on Form 4549, Income Tax Examination Changes, and Form 886-A, Explanation of Items. The Form 886-A will provide the IRS’s view of the facts, law, and argument in proposing the penalty. The taxpayer should respond within the prescribed timeframe to the IRS auditor. The taxpayer may also ask for a conference with the auditor and/or his manager to discuss the merits of the case.

If the taxpayer and the auditor/manager are unable to reach an agreement on the accuracy penalty, the taxpayer is able to appeal the penalty proposal, before assessment, to the IRS Independent Office of Appeals. The auditor will formalize his penalty proposal in an IRS “30-day” letter. A 30-day letter allows the taxpayer 30 days to request an appeal with the IRS Independent Office of Appeals on contested issues. Taxpayers need to provide a written protest to the contested issues to the IRS prior to the 30-day deadline in order to be afforded an appeal within the IRS.

Taxpayers may use the same appeal request format that is used to contest any of the tax issues in the audit. For cases in which the IRS is proposing adjustments or other changes of $25,000 or less to a tax year, the taxpayer should appeal using Form 12203, Request for Appeals Review.

For cases over $25,000, the taxpayer will need to prepare a protest.

The >$25,000 protest template is found in templates and notices, Request for Appeals Review.

If the taxpayer does not request an appeal of the penalty (along with other issues presented in the audit) before the end of the 30-day letter period, the IRS will proceed to issue the taxpayer a Statutory Notice of Deficiency (SNOD or “90-day letter”) that provides the taxpayer the right to petition the U.S. Tax Court before the penalty is assessed. Once the SNOD is issued, the taxpayer has lost his right to contest the penalty, and other issues, with the IRS Independent Office of Appeals. Taxpayers may petition the Tax Court or request audit reconsideration to contest the penalty.

Contesting an Accuracy Penalty on a CP2000 Underreporter Notice

CP2000 underreporter notices propose penalties on the initial notice sent to the taxpayer. The taxpayer must timely contest the penalty with an initial response. A timely response is made within 30-days of the date of the CP2000 notice.

Practice Tip: CP2000 letters are “combination” letters – that is, they serve two purposes for the IRS: to propose the adjustment to taxes and penalties AND to give the taxpayer an opportunity to contest/appeal the findings. Taxpayers who do not timely contest the adjustments or penalties will not receive a 30-day letter that provides the taxpayer the opportunity to go to the IRS Independent Office of Appeals. The next letter is the SNOD, which does not allow the taxpayer to go to IRS Appeals. Taxpayers should always respond timely to a CP2000 notice AND request an appeal if the IRS disagrees with the response. Taxpayers who do not timely respond and get a SNOD with the proposed adjustments/penalties should ask for CP2000 reconsideration.

Taxpayers will use the same dispute format as in an audit (<$25,000 proposed adjustments use a Form 12203 and >$25,000 proposed adjustments should use a custom petition format.

Abatement After Assessment: Reconsideration

Taxpayers can request reconsideration of an assessed penalty if they have not been given the opportunity to have their argument heard in an audit or CP2000 response. The function responsible for the penalty assessment decides whether the penalty should be abated. [IRM 20.1.5.5 at (4) (8-31-2021)]

There are four methods to request abatement after the penalty (or tax) has been assessed:

CP2000 or audit reconsideration: follow reconsideration procedures and ask for the IRS to review the taxpayer’s argument for penalty relief.
Collection Due Process appeal for an unpaid penalty: request a CDP hearing and argue the merits of the penalty. Taxpayers who have argued the penalty before IRS appeals in the past are unable to utilize the CDP option.
File for a claim for refund for paid penalties: use Form 843 to request a refund of the penalties. If the IRS disagrees, the taxpayer should then appeal a formal Notice of Claim Disallowance to the courts.
File an Offer in Compromise (OIC) — Doubt as to Liability: contest the penalties with an OIC that will contest the validity of the liability. This is a rarely used provision and is usually used when there are other audit issues that were not properly reviewed by the IRS before assessment.

Practice Tip: The most practical remedy for taxpayers is to ask for reconsideration. In many CP2000 penalty assessments, taxpayers may not have contested the accuracy penalty in their original response or may not have responded to the original notice. Taxpayers may ask the IRS to reconsider and provide their reasonable cause argument to abate the penalties. Taxpayers should expect about 6-12 months, or more, for the IRS to reconsider the penalty when the penalty originated from a CP2000. The taxpayer should expect longer times when the penalty originated from an audit.

Post-assessment accuracy penalty abatement request denials are not forwarded to IRS Appeals for reconsideration. Taxpayers receive Letter 854C and are instructed to use claim for refund procedures. Claim for refunds procedures require the taxpayer to pay the tax, penalties, and interest and file a claim for refund on Form 843. If the IRS denies the claim, it will issue the taxpayer a formal Notice of Claim Disallowance, which will allow the taxpayer to contest the penalty by suing the IRS in the U.S. District Court or Court of Claims. [IRM 20.1.5.5 at (5) (8-31-2021)]

TEMPLATES FOR IRS PENALTY RELIEF

Title

Useful for:

Failure to file/pay penalties:

Attachment to Form 843: Request to Waive Penalties for Reasonable Cause/Letter to Request Penalty Abatement

This template can be used to request abatement of the failure to file and/or pay penalties. The template can be used as an attachment to Form 843 or as a separate Penalty Abatement Request Letter. This template allows the taxpayer to outline his or her reasonable cause for penalty abatement.

Can also be modified to use as a Service Center Penalty Abatement appeal or as an attachment to Form 12153 when requesting penalty abatement through a Collection Due Process hearing.

Request for Appeals Review — Audit/CP2000 Accuracy Penalties

Appeal template to request hearing with IRS Independent Office of Appeals on proposed adjustments/changes of $25,000 or more, including penalties proposed in an audit or CP2000 notice.

IRS FORMS FOR PENALTY RELIEF

Form	Title	Useful for:	Latest Version
843	Claim for Refund and Request for Abatement	For use in requesting penalty abatement. The IRS will accept this form for both paid and unpaid penalties. Will trigger claim for refund procedures if the penalty is paid and abatement is denied.	12/2024
843 Instructions	Instructions for Form 843	How to complete and where to mail Form 843.	12/2024
12009	Request for an Informal Conference and Appeals Review	Written request and documentation for an informal conference with an IRS manager to dispute an IRS penalty.	12/2006
12203	Request for Appeals Review	Appeal form to request a hearing with an IRS Independent Office of Appeals on proposed adjustments/changes of $25,000 or less.	8/2022

COMMON IRS PENALTY NOTICES

Notice #	Title	Used for:
CP21B	Changes to Your Return	Notifies the taxpayer of the penalty amounts abated for the tax period.
853C	Penalty Abatement Denial Letter	Denial letter version of 853C. Notifies the taxpayer that penalty abatement was denied. Provides reason(s) for denial.
3503C	Version: Penalty Abatement Approved	Notifies the taxpayer that penalty abatement was approved. Letter will state “because of good compliance history” if first-time abatement was granted.
3503C	Version: Request for More Information for Penalty Abatement	Notifies the taxpayer that the IRS needs more information to grant abatement. The letter lists the information requested to grant abatement.
4549	Income Tax Examination Changes	Provides audit adjustments, including penalties. Accuracy penalty will be on Line 17 of the Form. A supplemental Form 886-A will explain the IRS rationale for the penalty.

IRS PENALTY PUBLICATIONS/HELPFUL INSTRUCTIONS

Publication	Title	Useful for	Version
Notice 746	Information about Your Notice, Penalty, and Interest	Detailed information on penalty and interest rates.	12/2024
Notice 1155	Disaster Relief from the IRS	Providing taxpayer notice that he or she potentially qualifies for disaster relief, including penalty suppression/relief.	9/2021
Notice 1215	What to Do If You Disagree with the Penalty	How to dispute an IRS penalty.	11/2006

An additional helpful IRS Publication is listed below. For the full text of this Publication, see the IRS website.

Publication/URL	Title	Useful for	Version
Pub. 4576	Penalty Appeals: Orientation to the Penalty Appeals Process	Short version of how the penalty appeals process works.	10/2020

Chapter 4- IRS Penalties and Penalty Relief Solutions

INTRODUCTION

UPDATES TO THIS CHAPTER

OVERVIEW OF INDIVIDUAL IRS PENALTIES AND PENALTY RELIEF

Introduction to IRS Penalties and Penalty Administration

Relevant IRM Sections for Penalties and Penalty Relief

IRS Forms/Publications Related to Penalties and Penalty Relief

Frequently Used IRS Penalty Phone Numbers

Common IRS Notices and Taxpayer Notifications Related to Penalties

Useful IRS Website Resources and IRS Online Tools to Help with Penalty Relief

Key Terms and Definitions

Identifying IRS Penalties

Five Reasons for IRS Penalty Relief

Abatement of Interest

Statute of Limitations to Request Penalty Abatement

IRS PENALTY ABATEMENT: LATE FILING AND LATE PAYMENT

Common IRS Penalties

Failure to Pay Penalty Basics

Failure to File Penalty Basics

First Option for Abatement of FTF/FTP Penalties: First-Time Penalty Abatement

Reasonable Cause Abatement

Requesting Reasonable Cause Penalty Abatement

Steps to Request FTF and FTP Penalty Abatement

Appealing Adverse Penalty Abatement Determinations

Late Filing Penalty Abatement for Related International Information Returns

Example: FTF and FTP Reasonable Cause Abatement Request

ACCURACY-RELATED PENALTIES

Overview of Accuracy-Related Penalties

Accuracy Penalties: Negligence/Disregard and Substantial Understatement

Reasonable Cause Exception for Accuracy Penalties

Contesting the Accuracy Penalty During the Audit or CP2000 Notice

Abatement After Assessment: Reconsideration

TEMPLATES FOR IRS PENALTY RELIEF

IRS FORMS FOR PENALTY RELIEF

COMMON IRS PENALTY NOTICES

IRS PENALTY PUBLICATIONS/HELPFUL INSTRUCTIONS