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The Law Office of Irina N. Goldberg is a Boutique tax law practice focusing on IRS and California civil tax and criminal tax controversy disputes. Our mission is to provide taxpayers with affordable and personalized assistance in dealing with aggressive federal and state taxing agencies. Call (760) 815-6220 or email to schedule your free consultation

Monday, February 20, 2012

Understanding IRS Penalties and Penalty Abatement Requests

When you own money to the IRS, there are two common penalties that the IRS can tack on to your liability in addition to interest.  If your tax return is filed late, the IRS will impose the "Penalty for Filing Tax Return After the Due Date (failure to file)" which is up to 25% of the net tax due.  This penalty is imposed at a rate of 5% per month, for every month that your tax return is not filed, subject to the 25% ceiling (reaching its maximum at 5 months)

The second penalty is the "Penalty for Late Payment of Tax (failure to pay)." This penalty is imposed at a rate of 0.5% per month, subject to the 25% ceiling (reaching its maximum at 50 months).  When both penalties are imposed together, the 5% failure to file penalty will be offset by the 0.5% failure to pay penalty.  This means that if you fail to file a tax return and pay the tax due on time, you will be subject to a maximum penalty of 47.5% of the net tax due (this is assuming that the failure to file and pay is not fraudulent).  These are very hefty penalties and it's best to try to avoid them if possible. 

This year, you have until April 17, 2012 to file your taxes (individual).  In the alternative, if you cannot file your taxes by April 17, you can submit to the IRS the "Application for Automatic Extension of Time To File U.S. Individual Income Tax Return".  By filing this form, you will get an additional six months to file your tax return, thereby avoiding the late filing penalty if the return is filed by October 17, 2012.  Nevertheless, this form does not extend the time to pay any taxes owed.  All taxes owed must be paid by the April 17, 2012 deadline or else the IRS will assess the late payment penalty.  

If, on the other hand, you can show that undue hardship will be suffered if payment is made on the payment due date, the IRS may grant an extension to pay.  In order to apply for this extension,  you should submit "Application for Extension of Time for Payment of Tax Due to Undue Hardship."


If you can show reasonable cause for failing to pay and file on time, the IRS may waive the failure to file and pay penalties. In order to request abatement, you should send a letter to the IRS (either with a delinquent individual tax return or after penalties have already been assessed) describing the penalties involved and providing an explanation for why reasonable cause exists.  In the Internal Revenue Manual (IRM), the IRS states that "reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligation but nevertheless failed to comply with those obligations." 

The IRS also lists several defenses that may satisfy the reasonable cause standard.  These include 
  • Death or serious illness of the taxpayer or a member of his immediate family 
  • Fire, casualty, natural disaster or other disturbance and
  • The taxpayer's inability to obtain records through no fault of his own.  
Even if your specific situation does not fall into one of these three categories of defenses, you should still submit a request for abatement.  
That is not to say that getting the IRS to grant your penalty abatement request will be easy.  
  • First, it could take three month to a year before your penalties are abated (while this request is pending, you must either pay your liability in full or you must be making payments through an installment agreement).  
  • Second, in order to get the late payment penalty abated, you need to, at least, pay the amount of tax owed (excluding interest and penalties) in full. 
  • Third, it is best to submit as much proof supporting your reasonable cause defense as possible.  For example, if you are claiming illness (either your own or in your immediate family), you should submit a doctor's note supporting the illness.  

Finally, many penalties abatement letters get rejected and must be appealed before they are accepted.  At the initial stage, your defenses will be inputted into a computer program and, unless the issues are extremely clear cut and well supported per IRS standards, it is likely that you will receive a computer generated rejection letter.  Appealing the rejection is highly recommended because the IRS representative reviewing the appeal has substantially more discretion and leeway to abate the penalties.  Remember, the penalty abatement process is not a simple one but it is worth fighting for considering that you may be assessed penalties up to 47.5% of the net tax due.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 


  1. This post is addressing the penalty on failure to file on time / failure to pay penalties. Not sure if you can shed some lights on penalties imposed on erroneous refund claim. This is a recent FAQ after tax season. Many clients feel quite confused by this penalty, esp. [IRC:§6676] A taxpayer is subject to a penalty for making an erroneous claims for refund or credit. If a claim for refund or credit with respect to income tax is filed for an amount in excess of the amount allowed, the taxpayer is liable for a penalty equal to 20% of the excess amount unless the claim for the excess amount has a reasonable basis.

    The penalty does not apply to any disallowed portion relating to the earned income credit or any disallowed portion subject to accuracy-related or fraud penalties.

    I ran into a very good post written by a tax attorney, but still cannot get the point. Thx.