Tax Tip Tuesday: IRS Penalty Abatement Basics for Individuals and Businesses
Opening an IRS notice and seeing a penalty tacked onto your balance is stressful, whether it’s on your personal return or your company’s. The good news: many penalties aren’t final. The IRS has formal relief programs that can remove late-filing, late-payment, and late-deposit penalties, sometimes with a single phone call. This process is called penalty abatement, and knowing the basics can save you hundreds or even thousands of dollars.
What Is Penalty Abatement?
Penalty abatement is the IRS removing (or reducing) a penalty it has already assessed. It doesn’t erase the underlying tax you owe, but it can wipe out the penalty and the interest charged on that penalty.
Relief isn’t automatic in most cases. You, or your tax professional, generally have to ask for it.
Common Penalties That Can Be Abated
For Individuals
• Failure to file: 5% of the unpaid tax for each month (or part of a month) the return is late, up to 25%.
• Failure to pay: 0.5% of the unpaid tax per month, up to 25%.
• Estimated tax penalty: for underpaying quarterly estimates. First-Time Abatement doesn’t apply, but a waiver may be available for casualty, disaster, or other unusual circumstances, or if you retired after age 62 or became disabled and had reasonable cause.
• Accuracy-related penalty: 20% of an underpayment from negligence or a substantial understatement. Relief generally requires showing reasonable cause and good faith.
For Businesses
• Late partnership returns (Form 1065): a flat penalty per partner, per month, even when no tax is due.
• Late S-corporation returns (Form 1120-S): the same flat penalty, per shareholder, per month.
• Late C-corporation returns (Form 1120): the same percentage-based failure-to-file and failure-to-pay penalties that apply to individuals.
The Three Main Paths to Relief
1. First-Time Abatement (FTA)
First-Time Abatement is an administrative waiver for taxpayers with a good compliance history. You don’t need to explain why you were late. You generally qualify if:
• You timely filed the same type of return for the prior three years
• You had no penalties in that period, other than an estimated tax penalty or a penalty that was later removed for reasonable cause
• You have filed all currently required returns, or filed a valid extension
• You have paid the tax due, or have an installment agreement in place and are current on your payments
FTA applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties, plus the late-filing penalties for partnership and S-corporation returns. It works for individuals and businesses alike.
2. Reasonable Cause
If something outside your control kept you from filing or paying on time, and you acted with “ordinary business care and prudence,” the IRS may remove the penalty for reasonable cause. Common qualifying situations include:
• Fire, natural disaster, or other casualty
• Serious illness, incapacitation, or death of the taxpayer, an immediate family member, or (for a business) a key owner or officer
• Inability to obtain necessary records despite reasonable efforts
• Other circumstances beyond your control
What usually doesn’t qualify: forgetting the deadline, being too busy, or lack of funds on its own. Relying on someone else to file for you is also generally not reasonable cause, since the Supreme Court held in United States v. Boyle that the duty to file on time can’t be delegated. For businesses, that includes a bookkeeper or outside preparer who missed a deadline.
Tip: Documentation matters. Hospital records, insurance claims, and a clear timeline showing when you became able to comply make a reasonable cause request much stronger.
3. Statutory Exceptions and IRS Error
The IRS must remove a penalty that resulted from erroneous written advice it gave you. Penalties can also be removed when the IRS made an error, or when a federally declared disaster postponed your deadline but a notice was issued anyway.
Late-Filing Penalty Relief for Partnerships and S-Corporations
Partnerships and S-corporations usually don’t pay income tax themselves, so many owners are surprised to receive a penalty notice for a late return. This penalty is calculated per owner, not on tax owed.
How the Penalty Works
• Amount: $255 per partner or shareholder, per month (or part of a month), for returns due in 2026. The amount is adjusted for inflation each year.
• Duration: up to 12 months, so the maximum is $3,060 per owner.
• Deadline: the 15th day of the third month after year-end (March 15 for calendar-year entities), or September 15 with a Form 7004 extension.
• Incomplete returns: the penalty can also apply when a return is filed on time but is missing required information.
With more owners or a longer delay, the penalty adds up quickly. A partnership with 10 partners that files 12 months late faces $30,600 in penalties, even with zero tax due.
Relief Options for Entity Returns
First-Time Abatement. FTA applies to partnership and S-corporation late-filing penalties. The entity generally qualifies if it filed the same return type on time for the prior three years with no penalties, and has filed all currently required returns.
Small partnership relief (Rev. Proc. 84-35). Many small partnerships can get the penalty removed without a hardship story. You generally qualify if:
• The partnership is a domestic partnership with 10 or fewer partners (a married couple filing jointly counts as one partner)
• Every partner is an individual or the estate of a deceased partner, with no corporations, trusts, or LLC partners
• Each partner’s share of every item is the same (no special allocations)
• Every partner fully reported their share of partnership income and deductions on a timely filed return
Small partnership relief isn’t available to S-corporations, and it has to be requested. Because it doesn’t depend on compliance history, it may be worth raising first so FTA remains available for a future year.
Reasonable cause. The same standard applies to entities as to individuals. A serious illness or death of a key owner, a disaster, or records that were destroyed may qualify. A preparer or bookkeeper who missed the deadline generally does not.
What About C-Corporations?
A C-corporation’s late-filing penalty is a percentage of the unpaid tax, just like an individual’s. If the corporation owes no tax, there is generally no late-filing penalty to abate. When penalties do apply, FTA and reasonable cause relief work the same way they do for individuals.
Examples: What Penalty Relief Can Save
Individual Example
Maria files her 2025 Form 1040 three months late with no extension. She owes $10,000 and pays in full when she files. She had no penalties for 2022, 2023, or 2024.
Penalty | Amount |
Failure to file (4.5% × 3 months) | $1,350 |
Failure to pay (0.5% × 3 months) | $150 |
Total penalties | $1,500 + interest on penalties |
Because Maria qualifies for FTA, she can request removal of the full $1,500, and the interest charged on those penalties comes off too. She still owes interest on the $10,000 of tax itself, which generally can’t be waived.
(When both penalties apply in the same month, the failure-to-file rate is reduced by the failure-to-pay rate, which is why the monthly late-filing charge is 4.5% rather than 5%.)
S-Corporation Example
Bright Path Design, Inc., an S-corporation with three shareholders, files its 2025 Form 1120-S four months late with no extension. The company owes no tax, since S-corporation income passes through to the shareholders, but the late-filing penalty still applies.
Calculation | Amount |
$255 × 3 shareholders × 4 months | $3,060 |
Bright Path filed its 1120-S on time for the prior three years with no penalties, so it qualifies for FTA and can ask the IRS to remove the entire $3,060.
Partnership Example
Three siblings own a rental property through an LLC taxed as a partnership. They split everything equally, and each reported their share on a timely filed Form 1040. The LLC files its 2025 Form 1065 five months late.
Calculation | Amount |
$255 × 3 partners × 5 months | $3,825 |
The LLC meets every requirement of Rev. Proc. 84-35, so it can request removal of the full $3,825 under small partnership relief, keeping FTA in reserve.
How to Request Penalty Abatement
1. Review the notice. Confirm which penalty was charged, for which tax year or quarter, and the amount.
2. Address the balance. Pay the tax or set up a payment plan. FTA requires it, and penalties and interest keep growing on unpaid balances.
3. Call the number on the notice. Many FTA requests, for individuals and businesses, can be approved over the phone, often on the same call.
4. Or submit a written request. Use Form 843 (Claim for Refund and Request for Abatement) or a letter explaining the basis for relief, with supporting documents. For a business, the request should come from an owner, officer, or authorized representative.
5. Appeal if denied. If the IRS rejects your request, the denial letter explains how to appeal. You don’t have to accept the first answer.
Already paid the penalty? You can still request abatement and a refund, generally within three years of filing the return or two years of paying the penalty, whichever is later.
Common Mistakes to Avoid
• Waiting too long. Unpaid balances keep accruing penalties and interest while you wait.
• Assuming “no tax due” means no penalty. Partnerships and S-corporations owe late-filing penalties per owner, per month, even with zero tax on the return.
• Overlooking reasonable cause. The IRS generally applies FTA first when you qualify, but if you have documented reasonable cause, include it. It may support relief in a future year when FTA isn’t available.
• Assuming interest on the tax will be removed. Interest on the underlying tax is statutory and rarely waived.
• Skipping the extension. Form 7004 is simple to file and gives partnerships and S-corps six more months. A missed extension is one of the most common causes of these penalties.
• Ignoring notices. Unanswered notices can escalate to collection action.
A penalty on your IRS notice isn’t necessarily the final word, for you or your business. If you have a clean history, First-Time Abatement may remove it with little more than a request. If life got in the way, reasonable cause relief may apply. Either way, you have to ask.
• File on time, even if you can’t pay. The late-filing penalty is ten times the late-payment penalty.
• If you can’t pay in full, set up a payment plan to stop the damage and keep FTA eligibility.
• Business owners: calendar partnership and S-corp deadlines (March 15 for calendar-year entities) and file extensions when needed.
• Small partnerships: confirm each partner reports their share on a timely return, which keeps Rev. Proc. 84-35 relief available.
• Keep records of any illness, disaster, or other hardship that affected your ability to comply.
• Protect your clean compliance history. It’s what makes FTA available when you need it.
Received an IRS notice with penalties? MKHS Tax Group helps individuals and businesses review IRS notices, determine whether First-Time Abatement, small partnership relief, or reasonable cause applies, and handle the request with the IRS on their behalf. Contact us at info@mkhstaxgroup.com.
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