A penalty notice reads like a verdict. It is closer to an opening offer. Most business penalties are assessed automatically by a computer that has seen a date and a return and nothing else, and the process for having a human look at the facts is available to anyone who uses it.
First-time abatement
An administrative waiver, not a judgment about your excuse. If the taxpayer (the entity, or the owner for personal penalties) filed and paid on time for the three years before the penalty year and has no other unresolved penalties, the IRS removes failure-to-file, failure-to-pay and failure-to-deposit penalties on request. Once per period. A new business in its first or second year generally qualifies because there is nothing in the prior three years to hold against it.
It is requested by phone or letter after the return is filed. It does not apply to accuracy penalties, information-return penalties like Form 5472, or estimated tax penalties.
Reasonable cause
For everything first-time abatement does not cover, and for later years, the standard is whether the taxpayer exercised ordinary business care and still could not comply. Circumstances the IRS accepts, with evidence: serious illness or death in the family, natural disaster, records destroyed, reliance on a professional who gave wrong advice about whether a filing was required, an IRS error, and, for first-time international filers, ignorance of an obscure requirement combined with prompt filing once discovered.
What does not work: "I was busy", "I did not have the money" (that is what instalment agreements are for), "my bookkeeper quit" without dates and evidence, and anything that suggests the pattern is ongoing.
Writing the statement
- State the penalty, the form and the year in the first line.
- Explain what happened, with dates, in plain sentences. Two paragraphs is usually enough.
- Show what you did to fix it and when: the return was filed on this date, the tax was paid on that date, controls are now in place.
- Attach evidence: medical letters, insurance claims, correspondence with the former preparer, the formation service's terms that never mentioned Form 5472.
- Ask for the specific relief: abatement of the failure-to-file penalty under reasonable cause, or under first-time abatement, or both in the alternative.
Form 5472 and information returns
These penalties are assessed on a different code section and first-time abatement does not apply. Reasonable cause does, and it works often for first-time filers who file before a notice or promptly after one. The statement is attached to the late form itself; a separate request follows if the penalty is assessed anyway. Appeals are available and are worth using: a considerable share of these penalties are removed at that stage.
What to expect
A written response in two to four months, sometimes longer. Interest on any tax continues throughout and is not abated. If the request is denied, an appeal within the stated window, or pay and claim a refund. The whole process is paperwork; the outcomes are better than the notices suggest, and worse for people who do nothing.
The check: if you have paid a penalty in the last two years without asking for abatement, ask now. Refund claims for paid penalties are allowed within the normal refund window.