Penalty Abatement
Penalty abatement is the removal or reduction of IRS penalties due to reasonable cause or first-time penalty abatement (FTA) relief for taxpayers with a clean compliance history.
Exam Tip
FTA = first-time abatement requires clean 3-year history. Reasonable cause = ordinary business care and prudence. Request via Form 843 or by calling IRS.
What is Penalty Abatement?
The IRS may remove or reduce penalties when a taxpayer demonstrates reasonable cause for noncompliance, or qualifies for administrative relief programs.
Types of Penalty Relief
| Type | Requirement |
|---|---|
| Reasonable Cause | Ordinary business care and prudence exercised |
| First-Time Abatement (FTA) | Clean compliance for prior 3 tax years |
| Statutory Exception | Specific code provision applies |
| Administrative Waiver | IRS-initiated relief program |
Reasonable Cause Examples
| Circumstance | Documentation Needed |
|---|---|
| Death/serious illness | Medical records, death certificate |
| Natural disaster | FEMA declaration |
| Fire/casualty | Insurance/police reports |
| Inability to obtain records | Written requests showing effort |
| Reliance on tax professional | Engagement letter, credentials |
First-Time Abatement (FTA) Requirements
Must meet ALL: (1) no penalties in prior 3 years, (2) all required returns filed or on valid extension, (3) all tax paid or on payment plan.
Exam Alert
FTA is administrative (not in the IRC) -- available for failure-to-file, failure-to-pay, and failure-to-deposit penalties. Reasonable cause requires showing ordinary business care. Request via Form 843 or phone call.
Study This Term In
Related Terms
Reasonable Cause
Reasonable cause is a defense against IRS penalties where the taxpayer demonstrates they exercised ordinary business care and prudence but were still unable to comply with their tax obligations.
Underpayment Penalty (Estimated Tax)
The underpayment penalty applies when a taxpayer does not pay enough tax through withholding or estimated payments during the year. Safe harbors: pay 100% of prior year tax (110% if AGI exceeds $150,000) or 90% of current year tax.
Circular 230
Circular 230 is the Treasury Department publication that governs the practice of tax professionals before the IRS, establishing standards of conduct, penalties for violations, and rules for written tax advice.
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