IRS Penalty Relief: First-Time Abatement and Reasonable Cause

An IRS penalty is not always the last word. Some penalties can be removed when you meet a specific rule, and others when you can show reasonable cause. Knowing which route fits your facts is the first step.

A penalty notice usually arrives with a number that feels fixed. It is not always. The IRS has several ways to reduce or remove penalties, and each has its own test.

This article explains the main ones: the rule for taxpayers with a clean filing history, the reasonable cause standard, and the separate standards for accuracy-related penalties and for different kinds of information returns. It also covers how to ask, and what happens if the answer is no.

Start by checking the penalty

Before you ask for relief, make sure the penalty is correct. The IRS suggests you first verify the information in the notice. If something is wrong, follow the instructions on the notice to correct it. If you can resolve the issue that way, the penalty may not apply at all.¹

Check the dates, the return type, and the tax period. Confirm that a payment or a return you sent was received. You can dispute an assessment and ask for other relief at the same time, and doing so does not concede that the penalty was correctly charged.

First-time abatement and the new automatic exemption

The most common administrative waiver is First Time Abate. It applies to the failure-to-file, failure-to-pay, and failure-to-deposit penalties for taxpayers with three years of timely compliance. In general, you must have timely filed the same type of return for the prior three years, or for 12 consecutive quarters if you file quarterly. You must also have had no penalty in that period, apart from the estimated tax penalty, or have had any penalty removed for reasonable cause or an IRS error.²

Businesses face two more tests. The IRS cannot have waived the failure-to-deposit penalty four or more times in the prior three years, and the penalty cannot have come from avoiding the electronic payment system.²

You do not need to name First Time Abate when you ask. You can call the number on the notice or send a written statement or Form 843, and the IRS reviews your account to see whether you qualify.²

The IRS is replacing this process. Beginning in summer 2026, an Automatic Exemption from Penalty applies to 2025 tax year returns and 2026 quarterly returns, and to later periods. If you file or pay late but filed on time and paid the tax due for the prior three years, the IRS will not assess the penalty, and you do not need to contact it.²

Imagine a business owner whose personal return arrives three weeks late after three years of timely returns and payments. Under the new rule, that late filing alone should not produce a penalty. The exemption covers specific return types, including Forms 1040, 1065 and 1120 and the common payroll returns. It does not cover returns filed once or infrequently, the daily delinquency penalty, or information reporting that depends on another filing.²

The transition has loose ends. If a penalty is assessed anyway and you believe you should have qualified, contact the IRS and ask for relief. First Time Abate remains available for earlier periods and for returns the new exemption does not consider.² If you do not qualify for either, the IRS says you may request relief on the basis of reasonable cause.

What reasonable cause means

Reasonable cause is decided on the facts of each case. For failure to file or pay, the question is whether you exercised ordinary care and prudence and were nevertheless unable to file or pay on time. For a business, the reasons apply to the person with authority to submit the return, make the deposit, or pay the tax.³

The IRS lists examples that may qualify: fires, natural disasters, or civil disturbances; an inability to get records; the death, serious illness, or unavoidable absence of you or an immediate family member; and system problems that delayed a timely electronic filing or payment.³

It also lists reasons that generally do not qualify. Relying on a tax professional is one. The IRS says you are generally responsible for complying even if someone else handles your taxes. Lack of knowledge, mistakes and oversights, and a lack of funds by itself are the others, although additional facts can change the picture in certain cases.³

That position has long roots. In United States v. Boyle, the Supreme Court held that a taxpayer’s reliance on an agent to file a return is not reasonable cause for a late filing.⁴ A due date belongs to the taxpayer, and handing the task of filing to someone else does not hand over the deadline. Relying on a professional’s substantive advice about what the law requires is a different question.

Different penalties, different tests

Accuracy-related penalties use a standard of reasonable cause and good faith. The IRS considers your efforts to report the correct tax, the complexity of the issue, your education and experience, and the steps you took to understand the rules or to get help from an advisor. If you relied on an advisor, it also asks whether you gave the advisor all the information needed and whether the advisor was competent and experienced with the situation.^{3, 5}

Reliance on advice can therefore matter for an accuracy-related penalty in a way it generally does not for a late return. The analysis changes with the penalty, which is why a notice should be read by someone who knows which test applies.

Penalties for ordinary information returns and payee statements, such as Forms 1099 and W-2, follow a third test. To show reasonable cause, you must show that you acted in a responsible manner before and after the failure, including by asking for extensions when possible and by fixing the problem quickly. You must also show significant mitigating factors, such as being a first-time filer of that form, a good compliance history, or events outside your control.^{3, 10} That test comes from the regulations under section 6724, and it is not a universal rule for every form.

International information returns are a different matter. Penalties for Forms 5471, 5472, 3520, 8938 and similar forms come from their own statutes and regulations, and each has its own reasonable cause rules and procedures.^{6, 7, 8, 9} The amounts can be large. The initial penalty for a foreign corporation or partnership is $10,000, Form 5472 carries $25,000, and some trust reports are percentage-based. Penalties can continue to grow after notice.^{6, 7, 9} Do not assume that the test above applies to them. A notice about an international form needs specific advice before you respond.

How to build a request

Whichever test applies, a strong request is clear and specific. The IRS asks for the notice, the penalty you want removed, and your reasons. A useful package includes:

A timeline: what happened, in order, with dates.
Supporting records: medical records, disaster notices, correspondence, or system error messages.
What you did next: when you learned of the problem and how quickly you filed or paid.
Who was responsible: the person with authority to file or pay, and what that person knew.
Your compliance history: the returns you filed and the payments you made in recent years.

Some requests can be accepted over the phone. If the IRS cannot approve relief by phone, you can ask in writing. Form 843, Claim for Refund and Request for Abatement, fits many requests, but the instructions on your notice and the procedure for your specific penalty should control.¹ For a simple first-time situation, a call is often the place to begin.

Correct the problem, but do not let it delay your response

Penalties keep growing while a return is missing or a balance is open. The failure-to-file penalty is 5 percent of the tax due for each month or part of a month, up to 25 percent. The failure-to-pay penalty is 0.5 percent a month, also up to 25 percent. When both apply in the same month, the filing penalty is reduced by the payment penalty, so the combined charge is generally 5 percent a month at first, not 5.5 percent.^{11, 12}

Partnerships and S corporations are different. Their late-return penalties are figured for each partner or shareholder for each month, and they can apply even when the entity owes no income tax.^{11, 13}

File any missing returns. Pay what you can, and if you cannot pay in full, ask for a payment plan, because the IRS notes that a plan can reduce future penalties.³ A request for relief is stronger when the underlying problem is being corrected. But correcting the problem should not delay a response to a notice or an appeal deadline, and you do not have to concede that a penalty was correct in order to ask for relief.

If the IRS says no

A denial is not necessarily final. The IRS explains how to appeal a penalty relief decision in the notice and on its penalty appeal page. If you cannot resolve the matter yourself, the Taxpayer Advocate Service is an independent organization within the IRS.¹

Interest follows the penalty. The IRS charges interest on penalties, and it automatically reduces or removes the interest related to any penalty it reduces or removes.¹ Interest on the tax itself is separate.

A practical way to approach it

Read the notice and confirm the facts. Identify which penalty it is, because the test depends on it. Gather the records that support your reasons. Correct the underlying problem. Then make a clear, honest request.

At O’Brien & Panchuk, our CPAs and Enrolled Agents work through this with clients: we review the notice, identify the right standard, and prepare the request. If you have received a penalty notice, we can help you decide where to begin.

Sources and research notes

Sources reviewed October 13, 2026, and revised the same day after a technical review. The Automatic Exemption from Penalty is new, and its rules may be refined; check the IRS page before you rely on it. Penalty amounts are statutory and some are adjusted for inflation. The examples are hypothetical and describe no client.

Internal Revenue Service, Penalty relief. Penalties eligible for relief, the types of relief, how to request it by phone or Form 843, how to appeal, and interest relief. ↩
Internal Revenue Service, Administrative penalty relief. First Time Abate eligibility, including the estimated tax penalty exception and the 12-quarter test, the Automatic Exemption from Penalty beginning in summer 2026, the additional business tests, and the returns not covered. ↩
Internal Revenue Service, Penalty relief due to reasonable cause. The reasonable cause standard for filing and payment, accuracy-related and information return penalties, the reasons that generally do not qualify, and payment plans. ↩
Supreme Court of the United States, United States v. Boyle, 469 U.S. 241 (1985). Reliance on an agent to file a return is not reasonable cause for a late filing. ↩
Treasury Regulations, 26 C.F.R. section 1.6664-4. Reasonable cause and good faith for accuracy-related penalties, including reliance on professional advice. ↩
U.S. Code, 26 U.S.C. section 6038. Foreign business entities (Forms 5471 and 8865): a $10,000 initial penalty per failure and continuation penalties. ↩
U.S. Code, 26 U.S.C. section 6038A. Foreign-owned U.S. corporations (Form 5472): a $25,000 penalty and continuation penalties, with its own reasonable cause provision. ↩
U.S. Code, 26 U.S.C. section 6038D. Specified foreign financial assets (Form 8938): a $10,000 penalty with continuation penalties and its own reasonable cause exception. ↩
U.S. Code, 26 U.S.C. section 6677. Foreign trust reporting: the greater of $10,000 or 35 percent of the gross reportable amount, with its own reasonable cause exception. ↩
Treasury Regulations, 26 C.F.R. section 301.6724-1. Reasonable cause for information returns and payee statements: responsible manner, significant mitigating factors, and events beyond the filer’s control. ↩
Internal Revenue Service, Failure to file penalty. The 5 percent monthly rate and 25 percent maximum, the reduction when a failure-to-pay penalty applies, and the separate partnership return penalty. ↩
Internal Revenue Service, Failure to pay penalty. The 0.5 percent monthly rate and the 25 percent maximum. ↩
U.S. Code, 26 U.S.C. section 6699. The S corporation late-return penalty, figured per shareholder for each month and assessed against the corporation. ↩

This article provides general information, not individualized tax or legal advice. Rules, forms and procedures change, and the right answer depends on your facts. Speak with a qualified professional before you act.