Penalty abatement is the IRS's removal or reduction of penalties assessed against a taxpayer, typically granted when the taxpayer demonstrates reasonable cause, qualifies for First-Time Penalty Abatement (FTA), or meets another statutory exception.
Grounds for abatement:
1. Reasonable Cause: - The taxpayer exercised ordinary business care and prudence but was still unable to comply. - Examples: serious illness, natural disaster, death in family, reliance on incorrect advice from a tax professional, destroyed records. - NOT reasonable cause: ignorance of the law, inability to pay (for failure-to-pay), or poor memory.
2. First-Time Penalty Abatement (FTA): - Available for failure-to-file, failure-to-pay, and failure-to-deposit penalties. - Requirements: No penalties in the prior 3 years (other than estimated tax), and currently compliant (filed all required returns or filed an extension, paid or arranged to pay any outstanding balance). - FTA is a one-time administrative waiver — not statutory.
3. Statutory exceptions: - Erroneous advice from the IRS. - IRS error. - Disaster area relief.
Common penalties subject to abatement: - Failure-to-file: 5% per month, max 25%. - Failure-to-pay: 0.5% per month, max 25%. - Failure-to-deposit: 2%–15% depending on lateness. - Accuracy-related: 20% of the underpayment. - Fraud penalty: 75% — almost never abated.
How to request: Write a letter to the IRS explaining the reason, or call/visit the IRS; use Form 843 for a formal written request.
> Exam tip: First-Time Penalty Abatement is the easiest to obtain and doesn't require showing reasonable cause. It requires clean compliance history for the prior 3 years. The fraud penalty (75%) is not abatable for reasonable cause. Key for EA Part 3.