How Can Tax Penalty Abatement Help You Manage Your Tax Debt?

Mandi Rogier

Expert Contributor
Last Updated: December 9, 2021

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Tax penalty abatement can save you from having to pay penalties associated with unpaid taxes and can even return these funds to you after you’ve paid them.
If an error or delay on the part of the IRS resulted in your penalty, you can file for tax penalty abatement.
If your history with the IRS is clear, you may qualify for tax penalty abatement even if you legitimately owe a penalty.

Tax penalties can be distressing, as they add an additional sum to the amount that you may already owe to the government. Navigating tax law is challenging, so it’s not uncommon for individuals to find themselves dealing with a penalty of some sort. It’s important to know that these penalties are not immutable. There are several situations where you may qualify to have the tax penalty removed. You can pursue these avenues for up to three years after filing, and request a refund of your penalty even if you’ve already paid.

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1 What is Tax Penalty Abatement

2 Qualifying for a Tax Penalty Abatement for Reasonable Cause

3 First Time Penalty Abatement

4 How Penalty Abatement Works

5 Ways to Avoid Tax Penalties

What is Tax Penalty Abatement

Tax penalty abatement forgives the penalty fee that was assigned to a taxpayer for improperly handling their taxes. There are many different penalties that you may be assigned, but the most common are:

Failure-to-file
Failure-to-pay
Failure-to-deposit

It’s best to file for tax penalty abatement as soon as you become aware of the penalty that you’re facing. The longer you wait, the higher your assessed penalties and charges may be. By including a request for tax penalty abatement with your original filing, you may avoid the stream of penalty notices and payment requests that can follow.

There are two primary ways to get tax penalty abatement. You can either assert that there was reasonable cause for your error or use your first time penalty abatement, which is something like a “get out of jail free” card. We’ll explore both options to help you determine which approach is best for your needs.

Qualifying for a Tax Penalty Abatement for Reasonable Cause

To receive a reasonable cause tax penalty abatement, you must prove that something happened outside your control that caused you to file or pay your taxes late. If you’re habitually late filing your taxes and do not have a reasonable explanation that proves the tardiness was out of your control, you will not qualify for tax penalty abatement. Some of the possible reasons for a qualifying tax penalty abatement include:

How Can Tax Penalty Abatement Help You Manage Your Tax Debt?

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IRS Error: The IRS made a mistake on your assessment. One of the most common is applying a payment to the wrong year. Check your tax transcripts to make find out if this happened to you.
IRS Delay: Delays caused by the IRS resulted in a late payment or late filing.
Bad Advice From the IRS: If the IRS provided you with misinformation regarding the tax debt, you may qualify for abatement. However, you will need solid proof of the poor advisement, as this type of abatement is rarely granted.
Reasonable Cases: Death, serious illness, or natural disasters.

You should contact the IRS as soon as possible to discuss your tax penalty abatement. If the penalty is less than $500, you can often settle the issue over the phone. Call the IRS prepared to offer a detailed description of what happened. Remember that you will need to cite one of the reasons above for your tax error to receive an abatement.

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For larger penalties, you will need to write a letter requesting reasonable cause abatement. Fill out Form 843, Claim for Refund and Request for Abatement. You should also include a penalty abatement letter explaining your situation. When writing this letter, it’s helpful to include:

Details of the situation
Citations of the law, including quotes from the IRS employee handbook (IRM)
Mention of your efforts to pay. If you have established an installment agreement to pay the penalty, your penalty fee is reduced by law.

If this task seems a bit overwhelming, you can reach out to a debt relief company like Solvable. We offer professional assistance navigating the ins and outs of tax penalty abatement.

First Time Penalty Abatement

The first time penalty abatement (FTA) is available just once. This program is designed to reward taxpayers who have an otherwise clear history and have made just one mistake that resulted in a penalty. You cannot apply the FTA to multiple tax years. If you owe penalties on more than one year, you can apply for FTA for the earliest year only.

To qualify for a First Time Penalty Abatement from the IRS, you must meet the following qualifications:

Have no penalties for the three prior years to the return that you received a penalty on.
File your current required return or an extension of time to file.
Pay or arrange to pay all taxes due.

How Penalty Abatement Works

If possible, include your request for penalty abatement with your taxes, so you can begin the process of reviewing this paperwork as soon as possible. It typically takes three to four months for the IRS to make a decision on a tax penalty abatement.

If your request for a reasonable cause abatement is denied, consider appealing the case. This decision is made by an individual and is therefore subjective. You may get a more favorable response when you appeal simply by reaching a different person.

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Ways to Avoid Tax Penalties

Understanding tax law can help you avoid many penalties that you may inadvertently incur simply because you weren’t aware of all the applicable rules. For example, if you’re assigned an estimated tax penalty for failure to pay enough in your estimated taxes during the year, you can immediately cancel out this penalty if you prove that you paid 90% of the assessed tax during the current year, or you paid 100% of the current tax shown on the prior year’s return.

We work with you to help you understand all issues surrounding your tax penalties. This is important because it will not only help you escape these penalties for the current year, it can help you avoid any similar penalties in the future. Keep in mind that a first time penalty abatement can only be used once. If you’re relying on this type of abatement for the current year, you should be particularly mindful to make sure you don’t incur additional penalties in the future.

Before you pay additional funds to the IRS for a tax penalty, thoroughly explore all your options for a tax penalty abatement. This may help you put much-needed money back in your pocket this year.

Mandi Rogier

Expert Contributor
Last Updated: December 9, 2021

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