Common IRS penalties

The IRS assesses penalties for several types of compliance failures. The most common for individual and small business taxpayers:

• Failure to file: 5% of unpaid tax per month, up to 25%
• Failure to pay: 0.5% of unpaid tax per month, up to 25%
• Failure to deposit (payroll): 2–15% of the unpaid deposit, depending on how late it is
• Accuracy-related penalty: 20% of the underpayment attributable to negligence or substantial understatement

Interest accrues separately on top of penalties, at the federal short-term rate plus 3%. Penalties and interest together can significantly increase the total amount owed beyond the original tax.

First-Time Penalty Abatement (FTA)

First-Time Penalty Abatement is an administrative waiver the IRS grants to taxpayers who have a clean compliance history. It applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties.

Eligibility requirements

To qualify for FTA, you must meet all three of the following:

• Clean penalty history: No penalties (other than estimated tax penalties) for the prior three tax years
• Filed all required returns: All required returns have been filed, or extensions have been requested
• Paid or arranged to pay: Any tax owed has been paid, or you have entered into an installment agreement in good standing

FTA applies to one tax year at a time. If you have penalties for multiple years, FTA can only be applied to the earliest year — subsequent years require reasonable cause relief.

Reasonable cause relief

If you do not qualify for FTA — or if you have penalties for multiple years — you may still be able to get penalties waived through reasonable cause relief. The IRS will consider abating penalties when you can demonstrate that you exercised ordinary business care and prudence but were unable to comply due to circumstances beyond your control.

Circumstances the IRS has accepted as reasonable cause include:

• Serious illness or death of the taxpayer or an immediate family member
• Natural disaster, fire, or other casualty that destroyed records
• Reliance on incorrect advice from a tax professional (in limited circumstances)
• Inability to obtain records necessary to determine the tax owed

Reasonable cause requests require a written explanation with supporting documentation. The IRS evaluates them on a facts-and-circumstances basis — there is no guarantee of approval.

How to request penalty abatement

By phone

Call the IRS at the number on your notice. State that you are requesting first-time penalty abatement and that you meet the eligibility requirements. The representative can check your compliance history and grant the abatement on the call. Ask for a confirmation number.

By letter

Write a letter to the IRS address on your notice. State the tax year, the penalty amount, the type of penalty, and that you are requesting first-time penalty abatement (or reasonable cause relief, with your explanation and documentation). Send by certified mail and keep a copy.

By Form 843

If you have already paid the penalty and want a refund, file Form 843 (Claim for Refund and Request for Abatement). You generally have three years from the date the return was due or two years from the date the penalty was paid, whichever is later.