Tax Penalty Abatement

Depending on the type of civil tax penalty, the IRS will remove or abate a civil penalty where you can demonstrate reasonable cause and not willful neglect. This article outlines the basic types of tax penalties and defenses available to taxpayers.

Practice Pointer: If you qualify as a first time “offender,” your tax penalty may be removed based on your compliance history rather than on any reasonable cause information. See the First Time Abate (FTA) procedures at I.R.M. 20.1.1.3.6.1.

Types of Civil Tax Penalties and Defenses

A civil tax penalty will likely fit into one of four categories: (i) failure to timely file a return; (ii) failure to timely pay the amount of tax liability owed; (iii) failing to adequately prepay the correct amount of tax liability (estimated tax penalty); and (iv) accuracy-related penalties for not reporting the correct amount of tax on the return.

An abatement is a reduction of assessed penalties. Generally, the IRS may approve an abatement of a civil tax penalty for IRS error, reasonable cause, administrative and collection cost not warranting collection of penalty, discharge of penalty in bankruptcy, and the IRS’s acceptance of a partial payment of assessed penalty. If the tax penalty has been assessed and paid, a taxpayer could file a refund (abatement) on Form 843.

Reasonable Cause Relief

The first two tax penalties, commonly called the delinquency penalties, can be avoided upon a showing that the lateness was reasonable under the circumstances, and that you did not willfully neglect your responsibilities. There is no reasonable cause exception to the estimated tax penalty. Finally, an accuracy-related penalty can be avoided if the taxpayer had reasonable cause for the position taken and acted in good faith or if there was substantial authority for a substantial understatement.