Sharpe CPA / Tips about taxes / Penalty abatement

Penalty abatement, the way the IRS manual describes it.

IRM 20.1.1, Introduction and Penalty Relief, is what the IRS employee reading your request is told to apply. Here is what it provides, the situations it names, and how to ask.

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IRM 20.1.1.3

Criteria for relief from penalties.

IRM 20.1.1 is part of Part 20, Penalty and Interest; the current version is effective November 25, 2025. Section 20.1.1.3 sets out the grounds on which a penalty can be removed. The burden is on the taxpayer to show one of them applies.

IRM	Ground for relief	What it covers
20.1.1.3.2	Reasonable cause	The taxpayer exercised ordinary business care and prudence but could not comply, for reasons the IRM describes one by one below.
20.1.1.3.3.1	Statutory and regulatory exceptions	Relief written into the Code or regulations — the timely-mailing rule of IRC 7502, disaster postponements under IRC 7508A, abatement for erroneous written IRS advice under IRC 6404(f).
20.1.1.3.3.2	Administrative waivers	Relief the IRS grants by policy, the most used being First Time Abate (20.1.1.3.3.2.1).
20.1.1.3.4	Correction of service error	The penalty resulted from an IRS mistake — a misapplied payment, a wrong computation, a return processed late.

IRM 20.1.1.3.3.2.1

First Time Abate — and the new automatic exemption.

What it removes

Failure to file — IRC 6651(a)(1).
Failure to pay — IRC 6651(a)(2) and (a)(3).
Failure to deposit — IRC 6656, for employment and other deposit taxes.
For a single return and tax period. It does not remove accuracy-related penalties or the estimated tax penalty.

Who qualifies

A clean history. The same type of return was timely filed for the three prior years (or 12 consecutive quarters), and either no penalty was assessed, other than an estimated tax penalty, or any penalty assessed was later abated for reasonable cause or IRS error.
Current returns filed. Returns currently required are filed, or on a valid extension.
No reasonable cause needed. The request need not name FTA or include documents; the IRS’s Reasonable Cause Assistant checks for First Time Abate before it weighs reasonable cause.
The failure-to-pay penalty keeps accruing until the tax is paid, so relief granted early covers only the amount assessed to that date.

Saving First Time Abate. A penalty abated for reasonable cause does not spoil the three-year history; one abated under First Time Abate does. When the facts support reasonable cause, some practitioners ask for it first and request First Time Abate only in the alternative.

New: Automatic Exemption from Penalty (AEP)

Starts summer 2026, for 2025 tax year returns and 2026 quarterly returns and later.
Automatic. Applied when the original return finishes processing: a taxpayer who files or pays late in the current year but timely filed and paid for the three prior years (or 12 quarters) is not assessed the penalty at all, and the IRS sends a notice saying so.
Returns covered: Forms 1040, 1065 and 1120; Forms 940, 941, 943, 944 and 945; and Form CT-1.
Failure to pay does not accrue under AEP, unlike First Time Abate.

What that means for practice

For 2025 returns onward, check the notice before asking: the penalty may never have been assessed.
Earlier years, and returns AEP does not reach, still need First Time Abate or reasonable cause.
A client who does not qualify for AEP should request relief based on reasonable cause, as the IRS itself advises.
The IRS page comparing First Time Abate and AEP is the place to confirm the details as the program rolls out.

IRM 20.1.1.3.2

Reasonable cause, and the situations the manual names.

Reasonable cause is based on the taxpayer’s exercising ordinary business care and prudence and still being unable to comply (IRM 20.1.1.3.2.2). The IRM tells the employee to weigh the taxpayer’s compliance history over the preceding years, the length of time between the event and the taxpayer’s eventual compliance, and whether the circumstances were beyond the taxpayer’s control and could not have been anticipated.

A good request answers those three questions directly: what happened and when, why it prevented timely compliance, and how quickly the taxpayer came into compliance once it ended.

IRM 20.1.1.3.2.2.1

Death, serious illness, or unavoidable absence Often granted

Relief can apply when the taxpayer, or a member of the taxpayer’s immediate family, died or was seriously ill, or the taxpayer was unavoidably absent. For a business, the person affected must be the one with sole authority to sign the return, make the deposit or pay the tax.

Document: the dates of the illness, death or absence against the due date; why no one else could act; and that the return was filed or the tax paid promptly once the circumstance ended.

IRM 20.1.1.3.2.2.2

Fire, casualty, natural disaster, or other disturbance Often granted

Relief can apply when the event made timely compliance impossible despite ordinary business care and prudence. Where the IRS has declared disaster relief, deadlines may be postponed outright under IRC 7508A — check that first.

Document: the event and its date, what was destroyed or disrupted, and how quickly the taxpayer complied afterward.

IRM 20.1.1.3.2.2.3

Unable to obtain records Depends on the facts

Relief can apply when records needed to comply were unavailable for reasons beyond the taxpayer’s control and the taxpayer still acted with ordinary care — for example, by filing on the best information available and amending later.

Document: which records, why they were unavailable, the efforts to get them, and whether an estimate could have been filed.

IRM 20.1.1.3.2.2.4

Mistake was made Generally not enough

The IRM says a mistake is generally not in keeping with ordinary business care and prudence. Relief turns on the circumstances behind it, not the mistake itself.

Document: what caused the error and why it happened despite reasonable care — the story behind the mistake, not the mistake.

IRM 20.1.1.3.2.2.5

Erroneous advice or reliance Depends on the facts

Written advice from the IRS in response to a specific written request is grounds for abatement by statute under IRC 6404(f). Reliance on a tax professional can be reasonable cause when the adviser was competent, was given all the facts, and the taxpayer actually relied on the advice in good faith. Oral IRS advice is weighed on the facts.

Document: the request and the written response; or the adviser’s qualifications, what they were told, and what they advised. Relying on someone to file or pay is not the same as relying on advice.

IRM 20.1.1.3.2.2.6

Ignorance of the law Depends on the facts

Generally not enough on its own, but relief can apply when the taxpayer made a reasonable, good-faith effort to comply, or could not reasonably be expected to know of the requirement — a first-time filing obligation, or a recent change in the law.

Document: the taxpayer’s education and experience, whether they had been subject to the requirement before, and any penalty history.

IRM 20.1.1.3.2.2.7

Forgetfulness Generally not enough

The IRM says forgetting, or relying on someone else to file or pay, is generally not reasonable cause: the duty to file and pay cannot be delegated.

Document: if this is really the fact pattern, look to First Time Abate instead.

Asking for it

How to request relief.

Check for IRS error first. A misapplied payment or a notice issued in error is corrected under IRM 20.1.1.3.4 — get the account transcript before arguing anything else.
Check for First Time Abate. For 2025 returns onward, see whether AEP already applied. Otherwise many failure-to-file and failure-to-pay penalties can be removed by phone, on the practitioner line or the number on the notice, without a written statement.
Write the reasonable cause statement. Respond to the notice in writing, or file Form 843, Claim for Refund and Request for Abatement. Name the penalty, the tax period and the amount; state the facts in date order; cite the IRM section that describes the situation; and attach the evidence.
Mind the deadline for a refund. If the penalty has been paid, the request is a claim for refund, generally due within three years of the return’s filing or two years of payment (IRC 6511).
If it is denied, appeal. A denial letter explains how to request review by the Independent Office of Appeals.

Interest generally is not abated for reasonable cause, but interest charged on a penalty falls away with the penalty, and IRC 6404(e) allows interest to be abated for unreasonable IRS error or delay in a ministerial or managerial act.

A summary for convenience, not a substitute for the Internal Revenue Manual or the Code. See also the IRS manual and Circular 230. Check the current text of IRM 20.1.1 before relying on it.