IRS Penalty Abatement: When Reasonable Cause Can Remove Your Penalties
Updated July 2026
An IRS penalty notice does not always mean the penalty is final. Depending on the penalty, the tax period, your filing and payment history, and the circumstances that caused the problem, the IRS may remove the penalty or prevent it from being assessed.
The IRS generally calls this penalty relief. Taxpayers and tax professionals also commonly refer to it as penalty abatement.
Two important forms of relief are reasonable cause relief and the new Automatic Exemption from Penalty program. The automatic program is beginning to replace the longstanding First Time Abate program for eligible returns.
Can an IRS Penalty Be Removed?
The answer depends on more than whether the taxpayer has a sympathetic explanation. Every penalty has its own legal standard, eligibility requirements, and administrative procedures.
Before requesting relief, the taxpayer should identify:
- The specific penalty assessed
- The tax return and tax period involved
- Whether the IRS calculated the penalty correctly
- Whether the taxpayer qualifies for automatic administrative relief
- Whether the facts support reasonable cause
- Whether documentation is available to substantiate those facts
- Whether a response or appeal deadline applies
Key point: Automatic penalty relief and reasonable cause relief are separate programs. A taxpayer who does not qualify for automatic relief may still have a valid reasonable cause argument.
What Is the Automatic Exemption from Penalty?
In July 2026, the IRS announced the Automatic Exemption from Penalty program, commonly called AEP. The program is designed for taxpayers who normally file and pay on time but experience a single compliance lapse.
Unlike First Time Abate, an eligible taxpayer does not need to call the IRS, file a form, or submit a separate request. The IRS applies AEP automatically when an eligible original return completes processing.
If AEP applies, the IRS prevents certain penalties from being assessed. The IRS then sends a notice explaining that the penalty was not assessed because of the taxpayer's prior compliance history.
Which Penalties Can AEP Cover?
AEP may apply to certain penalties for:
- Failure to file a tax return
- Failure to pay tax by the required date
- Failure to make a required federal tax deposit
- Late filing of certain partnership returns
- Late filing of certain S corporation returns
The IRS identifies the covered penalties under Internal Revenue Code Sections 6651, 6656, 6698, and 6699.
Which Returns Are Currently Eligible?
The IRS currently lists the following return series as eligible for AEP consideration:
- Forms 1040, 1065, and 1120
- Forms 940, 941, 943, 944, and 945
- Form CT 1
AEP begins with eligible 2025 tax year returns, eligible 2026 quarterly returns, and subsequent periods.
Returns that are filed only once or in connection with an infrequent event generally do not qualify. For example, the IRS announcement states that Form 706 estate tax returns and Form 709 gift tax returns generally are not eligible.
What Compliance History Is Required?
The taxpayer generally must have timely filed the same type of return during the three prior years. Quarterly filers generally must have twelve consecutive quarters of timely compliance.
The current IRS criteria also require that:
- No disqualifying penalty was assessed during the applicable compliance period
- A prior penalty may still be acceptable if the IRS later removed it for reasonable cause or IRS error
- Business taxpayers satisfy additional requirements involving prior deposit penalties
- A deposit penalty was not imposed because the taxpayer attempted to avoid the Electronic Federal Tax Payment System
The detailed account history matters. A taxpayer should not assume eligibility merely because the taxpayer generally remembers filing on time.
What AEP Does Not Cover
AEP does not apply to every return or every penalty. The IRS specifically states that it generally does not cover:
- Accuracy related penalties
- Information return penalties
- Daily delinquency penalties
- Other penalties outside the covered failure to file, failure to pay, and failure to deposit categories
AEP also does not eliminate the underlying tax. The taxpayer remains responsible for unpaid tax, interest on the tax, and any penalty that is not covered by the program.
What Is Happening to First Time Abate?
First Time Abate has historically allowed taxpayers with a satisfactory compliance history to request administrative relief from certain failure to file, failure to pay, and failure to deposit penalties.
The principal difference is that First Time Abate must be requested after a penalty has been assessed. AEP is automatic and prevents an eligible penalty from being assessed during original return processing.
| Issue | First Time Abate | Automatic Exemption from Penalty |
|---|---|---|
| How relief begins | The taxpayer contacts the IRS and requests relief. | The IRS applies relief automatically. |
| Penalty assessment | The penalty is generally assessed and later removed. | The eligible penalty is not assessed during original processing. |
| Supporting documents | Generally not required when eligibility is established through IRS account records. | No application or separate request is required. |
| Primary basis for relief | Prior compliance history. | Prior compliance history. |
| Future availability | Being phased out for eligible returns. | Becomes the replacement program for eligible returns. |
During the 2026 transition, First Time Abate remains available for certain earlier returns and for some eligible 2025 tax year returns or 2026 quarterly returns that were processed before AEP became available.
For eligible original returns with due dates on or after January 1, 2027, the IRS states that First Time Abate will no longer be available and will be replaced by AEP.
Transition issue: A taxpayer may receive a penalty notice during the transition even though the taxpayer appears to qualify for administrative relief. The notice, processing date, return type, and account history should be reviewed before deciding how to respond.
What Is Reasonable Cause Penalty Relief?
Reasonable cause relief is based on the facts and circumstances that prevented the taxpayer from complying with a tax obligation. Unlike AEP, reasonable cause does not depend solely on a clean filing history.
For many failure to file and failure to pay penalties, the taxpayer must show that the taxpayer exercised ordinary business care and prudence but was nevertheless unable to file or pay on time.
The IRS evaluates reasonable cause individually. A reason that supports relief from one type of penalty may not satisfy the legal standard for another penalty.
For a business, the IRS generally evaluates the circumstances of the person who had authority and responsibility to file the return, pay the tax, or make the deposit.
Examples of Circumstances That May Support Reasonable Cause
Depending on the penalty and the surrounding facts, potentially valid circumstances may include:
- Fire, natural disaster, or civil disturbance
- Inability to obtain essential tax or business records
- Death or serious illness of the taxpayer or an immediate family member
- An unavoidable absence
- A documented electronic filing or payment system problem
- Other events outside the taxpayer's control that directly prevented compliance
The event alone is not always enough. The taxpayer should be able to explain when the event began, how it affected the filing or payment obligation, what efforts were made to comply, and how quickly the taxpayer corrected the problem.
Reasons That Generally Are Not Enough by Themselves
The IRS states that the following explanations generally do not establish reasonable cause without additional supporting circumstances:
- Not knowing the filing or payment requirement
- A routine mistake or oversight
- Forgetting the due date
- Depending on a tax professional to complete the ministerial act of filing
- Lacking sufficient funds to pay the tax
Lack of funds alone generally does not establish reasonable cause for a late payment or deposit. However, the events that caused the financial problem may still be relevant if they demonstrate that the taxpayer exercised reasonable care and that circumstances outside the taxpayer's control prevented payment.
Reliance on a Tax Professional Requires Careful Analysis
Reliance on a tax professional does not create one universal defense.
For a late filing penalty, a taxpayer generally cannot establish reasonable cause merely by stating that a CPA, attorney, or return preparer was expected to file the return. In United States v. Boyle, the United States Supreme Court held that the duty to file a return on time is generally not delegable.
However, reliance on professional advice about a substantive tax issue may support reasonable cause and good faith for an accuracy related penalty. The IRS may consider whether the taxpayer provided complete and accurate information and whether the adviser had appropriate knowledge and experience with the issue. Treasury Regulation Section 1.6664-4 provides the principal regulatory standard.
Reasonable Cause for Information Return Penalties
Information return penalties have a more specific regulatory framework. Examples can include penalties involving Forms 1099, Forms W 2, and other reporting statements.
Under Treasury Regulation Section 301.6724-1, the taxpayer generally must show that the failure resulted from significant mitigating factors or events beyond the taxpayer's control. The taxpayer must also have acted in a responsible manner before and after the failure.
Relevant actions may include:
- Requesting an extension when available
- Taking steps to prevent a foreseeable filing failure
- Correcting system, record, or reporting problems
- Filing corrected information as quickly as possible
- Maintaining documentation of communications with employees, vendors, service providers, or government agencies
A general statement that the return was missed is usually less persuasive than a dated chronology supported by records.
Received an IRS Penalty Notice?
Start by identifying the notice and the issue involved. My IRS CP Notice Lookup can help identify the general purpose of many IRS CP notices.
The lookup is a starting point. The actual notice, tax return, account transcript, payment history, penalty calculation, and response deadline should be reviewed before requesting relief.
How to Prepare a Reasonable Cause Request
A strong reasonable cause request should connect the evidence to the legal standard for the specific penalty. It should not rely only on a general hardship statement.
The request should normally address:
- What happened. Identify the event, problem, or circumstance that caused the failure.
- When it happened. Provide beginning and ending dates whenever possible.
- Why compliance was prevented. Explain the direct connection between the event and the missed filing, payment, or deposit.
- What efforts were made. Describe attempts to obtain records, contact advisers, make payments, request extensions, or otherwise comply.
- When the problem was corrected. Explain how quickly the return, payment, deposit, or information statement was completed after the obstacle ended.
- What documents support the explanation. Include records that independently verify important facts.
Examples of Supporting Documentation
- Hospital records or a physician's letter showing the period of illness or incapacity
- Death certificates or related records
- Insurance reports, fire reports, or disaster records
- Correspondence showing efforts to obtain missing records
- Electronic filing rejection notices or payment confirmation records
- Letters and responses involving the IRS or another government agency
- Receipts, account statements, internal records, or service provider communications
The documentation should support the relevant dates and show why the taxpayer could not comply despite reasonable efforts.
How Is IRS Penalty Relief Requested?
Some penalty relief requests can be handled by calling the telephone number shown on the IRS notice. The taxpayer should have the notice, the penalty information, the relevant dates, and the supporting explanation available before calling.
If the IRS cannot approve relief by telephone, a written request may be required. Depending on the penalty and procedural posture, the taxpayer may submit a written statement or Form 843, Claim for Refund and Request for Abatement.
If the IRS denies the request, administrative appeal rights may be available. The denial notice should be reviewed promptly because response deadlines can apply.
Interest treatment: If the IRS removes or reduces a penalty, it will generally remove or reduce the interest attributable to that penalty. Relief from the penalty does not ordinarily eliminate interest charged on the underlying unpaid tax.
Why the IRS Notice and Account History Matter
A penalty request should not be prepared in isolation. The first step is determining whether the IRS assessment is correct.
Issues that may need review include:
- Whether the IRS used the correct filing date
- Whether a payment was posted to the correct tax period
- Whether a valid extension was recognized
- Whether the penalty was computed using the correct unpaid balance
- Whether AEP should have applied automatically
- Whether First Time Abate remains available during the transition
- Whether reasonable cause provides the stronger basis for relief
- Whether the taxpayer has appeal rights
My IRS and FTB Tax Resolution services include IRS notice review, penalty notice analysis, transcript review, prior filing analysis, response preparation, and tax representation.
Common Mistakes When Requesting Penalty Relief
- Requesting relief without identifying the exact penalty
- Assuming AEP applies to every return and every penalty
- Submitting a general hardship statement without dates or supporting records
- Relying solely on lack of funds
- Failing to explain what efforts were made to comply
- Waiting too long to correct the underlying filing or payment problem
- Ignoring a separate notice, collection, or appeal deadline
- Assuming that penalty relief also eliminates the underlying tax and interest
Final Considerations
The new Automatic Exemption from Penalty program should make relief simpler for taxpayers who qualify. It does not eliminate the need to review penalty notices carefully. The program is limited to selected returns, selected penalties, and taxpayers who meet the required compliance history.
Reasonable cause remains important for taxpayers who do not qualify for AEP, receive a penalty outside the program, or have facts that independently justify relief.
The strength of a reasonable cause request usually depends on the relationship between the legal standard, the chronology, the taxpayer's efforts to comply, and the available documentation.
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