Penalty Abatement involves formally asking the IRS to remove certain penalties that have caused your IRS tax debt to balloon into a higher amount.
What makes the penalty abatement process difficult for non-IRS experts is that the IRS treats certain penalties differently. Some penalties may qualify for First Time Penalty Abatement. Others require reasonable cause.
Major IRS penalties
- 1. Failure to File Penalty. This penalty is one of the biggest and most common penalties for not filing a tax return on time
- 2. Failure to Pay Penalty. This penalty applies when you file your return but do not pay the balance owed
- 3. Accuracy-Related Penalty. This penalty is usually a 20% penalty on the portion of tax the IRS says was understated
- 4. Estimated Tax Penalty. This penalty commonly affects self-employed individuals, investors, people with large capital gains, and people who reduce withholding too much
Reasonable cause penalty relief
Reasonable cause is a legal standard the IRS uses to decide whether penalties should be removed when a taxpayer can show they made a genuine effort to comply but were prevented by circumstances outside their control.
Common examples include serious illness, natural disasters, records destroyed by fire or theft, reliance on incorrect written IRS advice, or other events that made it impossible or extremely difficult to file or pay on time.
Getting penalties removed for reasonable cause often requires detailed documentation and a written explanation showing exactly what happened, when it happened, and how it directly caused the compliance failure.
Penalties for self-employed individuals
Self-employed individuals face IRS penalties more often than traditional employees because taxes are not automatically withheld from their income. Freelancers, independent contractors, and small business owners must estimate their taxes and make quarterly estimated tax payments throughout the year.
If those payments are missed or underestimated, the IRS can assess estimated tax penalties, failure to pay penalties, and interest, which can quickly increase the amount owed.
Many self-employed taxpayers do not realize they qualify for penalty abatement or IRS relief programs that can significantly reduce their tax balance.