IRS Penalty Relief: How to Get IRS Penalties Reduced or Eliminated

If you owe the IRS back taxes, there is a good chance that penalties make up a significant portion of your balance — sometimes 25% to 40% of the total amount due. What many taxpayers don't realize is that the IRS has formal programs specifically designed to reduce or eliminate those penalties. You don't have to accept the full penalty balance as fixed. In many cases a single phone call or a one-page written request is all it takes to get substantial penalties removed.

This post explains every penalty relief option available, who qualifies for each, and exactly how to pursue them.

Why IRS Penalties Add Up So Fast

Before getting into relief options it helps to understand why penalty balances grow so quickly.

The IRS charges several types of penalties on unpaid and unfiled tax debt:

Failure-to-File Penalty 5% of your unpaid balance per month — up to a maximum of 25% of the original tax owed. This is the most expensive penalty and it starts accruing from the original due date of the return.

Failure-to-Pay Penalty 0.5% of your unpaid balance per month — also up to a maximum of 25% of the original tax owed. This runs alongside the failure-to-file penalty until the return is filed.

Combined Maximum When both penalties apply simultaneously, the combined maximum is 47.5% of the original tax owed — nearly half again the original balance in penalties alone.

Interest On top of penalties, interest compounds daily at the federal short-term rate plus 3%. Interest is not technically a penalty and is harder to remove — but reducing the penalty balance reduces the amount interest accrues on.

On a $20,000 tax bill, penalties and interest combined can easily push the total balance to $28,000 or $30,000 within a few years. Penalty relief directly attacks that inflated balance.

Option 1: First Time Abatement

First Time Abatement — or FTA — is the IRS's most commonly used penalty relief program and the easiest to qualify for. It allows the IRS to waive failure-to-file, failure-to-pay, and failure-to-deposit penalties for taxpayers who meet specific compliance criteria.

Who qualifies:

To qualify for First Time Abatement you must meet all three of the following:

• You did not have any penalties assessed against you for the three tax years prior to the year you are requesting relief for

• You have filed all required returns or filed a valid extension for the year in question

• You have paid — or arranged to pay — any tax currently due

  
  

In other words this is for taxpayers who have a generally clean compliance history and hit a rough patch for one year. If you have been filing and paying on time for years and then suddenly find yourself with a penalty balance, FTA was designed for exactly your situation.

How to request it:

FTA can often be requested by simply calling the IRS at the number on your notice and asking for First Time Abatement. Have your tax history ready so you can confirm your prior compliance. In many cases the IRS will grant it on the phone call without requiring written documentation.

For larger penalty amounts a written request may be more appropriate to create a paper trail and ensure proper processing.

How much can it remove:

FTA can remove the entire failure-to-file and failure-to-pay penalty for the year in question. On a large balance this can be thousands of dollars removed in a single request.

Option 2: Reasonable Cause Penalty Relief

If you don't qualify for First Time Abatement — or if you have multiple years of penalties — you may qualify for reasonable cause penalty relief. This applies when you can demonstrate that your failure to file or pay was due to circumstances beyond your control rather than willful neglect.

What qualifies as reasonable cause:

The IRS evaluates reasonable cause claims on a facts-and-circumstances basis. Common qualifying circumstances include:

• Serious illness or medical emergency — your own or that of an immediate family member that prevented you from filing or paying

• Natural disaster — a federally declared disaster that directly affected your ability to comply

• Death in the family — particularly when the deceased handled financial matters

• Destruction of records — fire, flood, or other casualty that destroyed tax records

• Unavoidable absence — incarceration, hospitalization, or other circumstances that made compliance genuinely impossible

• Erroneous advice from the IRS — if you relied on incorrect written guidance from the IRS itself

• Inability to obtain records — documented inability to get necessary tax records from third parties despite good faith efforts

  
  

What does not qualify:

Ignorance of the law, lack of funds to pay, and reliance on a tax preparer who failed to file are generally not considered reasonable cause on their own — though some circumstances involving professional advice can qualify depending on the specifics.

How to request it:

Reasonable cause relief requires a written request — either submitted with Form 843 or as a standalone letter — explaining the specific circumstances, when they occurred, how they prevented compliance, and what steps you took to comply as soon as the circumstances resolved. Documentation supporting your claim should be included where available.

Option 3: Administrative Waiver

Beyond FTA and reasonable cause, the IRS has broader administrative waiver authority that allows them to remove penalties in certain circumstances based on IRS policy changes, systemic errors, or other administrative considerations.

One notable recent example — the IRS issued broad penalty relief for certain taxpayers who had automatic assessment penalties during the COVID period. Administrative waivers are less predictable than FTA or reasonable cause but worth exploring if other options don't apply.

Option 4: Statutory Exception

Certain specific circumstances are written into the tax code as exceptions to penalty assessments. These include situations like:

• A federally declared disaster area designation that affected your ability to file or pay

• Combat zone service for military members

• Certain circumstances involving estates and trusts

  
  

If any of these apply to your situation they provide a statutory basis for penalty removal that does not require the IRS to exercise discretion — the exception is built into the law.

How Penalty Relief Interacts With Your Overall Resolution

Getting penalties reduced or eliminated does not automatically resolve your underlying tax debt — but it significantly changes the math of your resolution in several important ways:

It reduces your total balance A lower balance means lower monthly payments in an installment agreement, a lower settlement amount in an Offer in Compromise, and less interest accruing going forward.

It may change your eligibility for other programs Reducing your balance through penalty abatement may bring you under the $50,000 threshold for a streamlined installment agreement — simplifying the resolution process significantly.

It should be pursued before other resolutions are finalized The best practice is to request penalty abatement before finalizing an installment agreement or OIC so that any penalties removed are reflected in the final balance and monthly payment calculation.

Visit our tax penalty abatement page for a full overview of how the abatement process works within a broader resolution strategy.

Can You Get Interest Removed Too?

Interest removal is much more limited than penalty removal. The IRS generally only abates interest when it resulted directly from IRS error or delay — for example if the IRS gave you incorrect written advice that caused you to underpay, or if an IRS processing delay caused interest to accrue on a balance that should have been resolved sooner.

In most cases interest is not removable regardless of circumstances. However reducing the penalty balance reduces the amount interest has been accruing on — which lowers the total interest figure going forward even if past interest cannot be removed.

What About Penalty Relief and the IRS Fresh Start Program?

The IRS Fresh Start Program reinforced and expanded the use of First Time Abatement as a tool for taxpayers entering into resolution agreements. Getting penalties removed through FTA or reasonable cause is fully compatible with — and often a component of — a broader Fresh Start resolution.

If you are pursuing an installment agreement or Offer in Compromise through the Fresh Start Program, penalty abatement should be evaluated at the same time as part of an integrated strategy. Visit our IRS Fresh Start Program page to understand how all of these tools work together.

Taxpayers With Penalty Balances Across the Country

Penalty balances affect taxpayers everywhere — in Memphis, Raleigh, Minneapolis, and San Antonio. Whether your penalties accumulated over one year or several, the relief programs we've described are available to qualifying taxpayers regardless of where you live or how the penalties were assessed.

Get Your Penalties Reduced — Call Today

IRS penalties are not set in stone. First Time Abatement alone removes billions of dollars in penalties for qualifying taxpayers every year — most of whom never knew they could ask. If penalties are driving your IRS balance, getting them reduced or eliminated is the first step toward a resolution you can actually afford.

Call Internal Tax Resolution at 888-908-4740 for a free consultation.

Our team evaluates penalty abatement eligibility for every client and pursues every available relief option before finalizing any resolution agreement. We serve taxpayers from Orlando and Miami to Des Moines and Lexington — and we'll make sure you're not paying a dollar more in penalties than you have to. Call today.