IRS Penalty Relief: First-Time Abatement and Reasonable Cause

Receiving a penalty notice from the Internal Revenue Service (IRS) can be alarming, and ignoring it can be a costly mistake. If you qualify, the IRS offers penalty relief through the First-Time Abatement (FTA) program for non-compliant taxpayers who were assessed certain penalties.

Key Takeaways

Don’t ignore IRS Penalties: Address penalty notices promptly. The FTA program offers a one-time relief for specific penalties (failure-to-file, failure-to-pay, failure-to-deposit) if you meet strict eligibility criteria, including a clean prior compliance history.

Understand FTA Limitations: Not all penalties qualify for FTA, such as estimated tax or accuracy-related penalties. You must also have filed all required returns and arranged to pay any tax due to be eligible.

Reasonable Cause is an Alternative: If FTA isn’t an option, Reasonable Cause (RC) relief may be granted for situations beyond your control. Be aware that the IRS considers FTA first, which could impact your future FTA eligibility if you apply for RC.

Take Action to Challenge Penalties: You have the right to challenge IRS penalties by phone, in writing, or online. If a penalty is reduced, the associated interest will also be automatically lowered, even though the IRS doesn’t directly abate interest.

What is the First-Time Abatement Penalty Relief?

The FTA program is an option for taxpayers who have a clean compliance history and have incurred specific penalties. It’s designed to give eligible taxpayers a one-time opportunity to get relief.

First-time penalty abatement is available for three types of penalties:

Failure-to-File

If you owe tax and don't file on time, the failure-to-file penalty is usually 5% of the unpaid tax for each month (or part of a month) that your return is late, up to a maximum of 25%.

If your return is over 60 days late, there's a minimum penalty for late filing; it's the lesser of $510 (for tax returns required to be filed in 2025) or 100% of the unpaid tax.

Failure-to-Pay

If you file your return on time but don't pay all tax owed, you'll generally have to pay a late payment penalty. The failure-to-pay penalty is one-half of one percent for each month (or part of a month) you pay late, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The rate increases to one percent if the tax remains unpaid ten days after the IRS issues a notice of intent to levy property.

If you file your return by its due date and request an installment agreement, the rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect.

Failure-to-Deposit

This penalty applies to employment and excise taxes and is based on whether the deposits are made timely, for the correct amount, and in the correct manner. Typically, penalties are as follows:

• 2% penalty on deposits made one to five days late
• 5% penalty on deposits made six to 15 days late
• 10% penalty on deposits made 16 or more days late, but before ten days from the date of the first notice the IRS sent asking for the tax due
• 15% penalty on amounts still unpaid more than ten days after the date of the first applicable IRS notice

Eligibility Criteria for FTA Relief

You must meet the following criteria for FTA relief:

• Clean Compliance History: You didn’t previously have to file a return, or you have no penalties for the three tax years prior to the tax year in which you received a penalty, unless the penalty was abated for reasonable cause. Incurring a penalty for underpaying estimated taxes will not preclude you from qualifying for FTA.
• Current Filing Compliance: You filed all currently required returns or filed an extension of time to file.
• Payment Arrangement: You have paid, or arranged to pay, any tax due. The status “Currently Not Collectible” does not qualify as compliant as it’s not an arrangement to pay and will preclude FTA.

Penalties Not Covered by FTA Relief

FTA relief does not apply to the following:

• Estimated tax penalty
• Accuracy related penalties
• Returns with an event-based filing requirement (e.g., Forms 706 & 709)
• Daily Delinquency Penalty (e.g., Form 990)
• Penalties assessed on certain Informational returns (e.g. Forms 5471*, 5472*, 8865, 3520, 3520-A, 926, 8938, 1096, and W-3)

*FTA is allowed if Form 5471 and/or 5472 are filed with Forms 1120 or 1065 and certain other criteria are met.

Reasonable Cause Relief Option

IRS Internal Revenue Manual (IRM) 20.1.1.3.2 (3-29-2023) states that Reasonable Cause (RC) relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but was nevertheless unable to comply with those obligations. Examples of reasonable cause include natural disasters, death, serious illness, erroneous advice or reliance, mistakes, and even forgetfulness.

FTA vs. Reasonable Cause: Which to Apply For?

A non-compliant taxpayer may instinctively apply for RC relief in the hopes that it will be granted instead of FTA (RC relief may be granted annually for most penalties, while FTA is only allowed once every four years). However, IRM 20.1.1.3 (10-19-20) states that FTA must be considered before RC. Therefore, applying for RC relief may inadvertently cause the FTA to be applied, barring the taxpayer from applying for FTA for another four years.

How to Request Penalty Abatement

FTA may be applied for online, in writing, or over the phone with the IRS. If you’ve already paid the penalty, you may file Form 843, Claim for Refund and Request for Abatement, to request a refund.

What About Interest on Penalties?

Taxpayers often ask about abating interest. The IRS does not provide relief from interest. It must charge interest by law, so you will continue to accrue interest until you have paid your account in full. However, if any penalties are reduced because of such provisions as FTA or RC, the related interest is also automatically reduced.

Don’t Panic: Take Action

If you’ve received an IRS penalty notice, don’t panic. You have a right to challenge the penalty. Simply put, “If you don’t ask, you won’t receive.” However, knowing what and how to ask are the keys.

Contact our tax professionals for assistance using the form below.