The IRS assessed over $18 billion in civil penalties on individual, estate, and trust tax returns in the 2023 fiscal year – up significantly from $14 billion in 2020. These penalties, along with accompanying interest charges, continue to encourage timely filing and payment. But many taxpayers qualify for relief such as first-time abatement, reasonable cause, or statutory exceptions, offering real opportunities to reduce or eliminate penalties and interest.
Key Takeaways
Pay taxes on time to avoid penalty fees and interest.
Interest can only be reduced or waived if penalty fees are reduced or removed.
Penalties may be reduced or waived due to a statutory exception, reasonable cause, or first-time penalty abatement.
Most Common IRS Penalties
There are over 150 different types of penalties in the U.S. Internal Revenue Code. Depending on the severity of the IRS penalty, monetary fines or the forfeiture of property may be involved. If it is a criminal penalty, you may also face jail time. The most common penalties include:
| Penalty Type | Fee Charged | Does The Penalty Max Out? |
| Failure to File (FTF) | 5% per month, for up to 5 months. | Yes. The penalty accrues up to a maximum of 25%. However, if over 60 days late, the minimum penalty is $510 (for returns due by 12/31/2024) or 100% of underpayment, whichever is less. |
| Failure to Pay (FTP) | .5% per month; Increases to 1% per month if the tax isn’t paid within 10 days of a Final Notice of Intent to Levy. Once approved for a payment plan, the FTP fee drops to .25% per month. | No. It continues until the tax debt is paid in full. |
| Accuracy-Related Penalty | 20% of tax underpayment due to negligence, disregard of rules (careless, reckless, or intentional), understatement of income tax, or valuation errors. | Yes. It’s a one-time fee. |
| Failure to Deposit (FTD) | 2% of unpaid deposit, if 1-5 calendar days late. 5% of unpaid deposit, if 6-15 calendar days late. 10% of unpaid deposit, if more than 15 days late. | Yes. 15% is the max if your payment is more than 10 calendar days late after your first notice/letter or the day you receive a request for immediate payment. |
| Underpayment of Estimated Tax | Based on time and rate of underpayment (no fixed %); IRS calculates using current interest rates. | Yes and no. It’s a one-time underpayment penalty fee, but you can also be hit with a failure-to-pay penalty if you don’t pay your taxes in full when you file your annual return. |
Notes:
- If FTF and FTP apply in the same month, the combined penalty is capped at 5% per month.
- Interest accrues on both penalties and unpaid taxes, which can significantly increase the amount you owe.
Can I Get My Interest Reduced or Waived?
Generally, the IRS does not reduce or remove any interest charges unless the penalty is removed or reduced. In very rare cases, due to an IRS error or delay, the IRS may remove any interest accrued due to its negligence. There is, however, one surefire way to reduce your interest – an IRS payment plan. If approved, the IRS will cut your Failure to Pay penalty in half, which will reduce your interest fees, as well.
Tax Tip
If you can’t pay your tax bill in full, apply for an installment agreement ASAP to keep penalties and interest fees to a minimum.
IRS Penalty Relief
It is possible to reduce or remove some tax penalties, though it is never guaranteed. There are three types of penalty relief offered by the IRS:
- Reasonable Cause. The IRS may waive an FTF, FTP, or FTD penalty if you can show reasonable cause why you were unable to meet your tax obligations. Death, serious illness, natural disasters, and the inability to obtain records are just a few examples. When requesting this type of penalty relief, you’ll need to establish the facts and provide sufficient evidence to support your claim.
- First-Time Penalty Abatement. You may qualify for First-Time Penalty Abatement, also known as an administrative waiver, if all of the following are true:
- No previous tax return was required or you haven’t been penalized within the last three tax years prior to the year you received the penalty.
- All required tax returns are filed or you have a filing extension.
- You have paid, or made arrangements to pay, any taxes due.
You may also qualify for an administrative waiver if you received incorrect oral advice from the IRS. Please note that the FTP penalty will continue to accrue until you have paid your taxes in full. Therefore, it’s best to wait until your balance is paid off before requesting First-Time Penalty Abatement.
- Statutory Exception. If you received incorrect written advice from the IRS, you may qualify for a statutory exception. IRS Form 843, Claim for Refund and Request for Abatement, should be filed when seeking this type of relief.
Underpayment of Estimated Tax Penalty Relief
The fees may be waived if any of the following are true:
- You did not owe taxes the previous year
- A disaster, casualty, or other unusual event caused you to miss the payment
- During the current tax year, you retired at age 62 or older
- You became disabled during the prior or current tax year
- You qualify under the “estimated tax safe harbor rule”
How The Estimated Tax Safe Harbor Rule Works
An underpayment penalty may be avoided if you use the safe harbor rule. Generally, the IRS will not charge an underpayment penalty if:
- You pay at least 90% of the tax you owe for the current year, or 100% of the tax you owed for the previous tax year, or
- You owe less than $1,000 in tax after subtracting withholdings and credits
If your adjusted gross income (AGI) is more than $75,000 (or $150,000 if married filing jointly), you must pay the lesser of 90% of the tax due on the current tax year’s return or 110% of the tax due for the previous year’s return.
Helpful Tips
Make sure you choose the correct penalty relief option for your situation and the best communication method. For First-Time Penalty Abatement requests, calling the IRS directly is your best option. Written requests, however, are better when seeking relief through reasonable cause.
Unfortunately, the IRS is notorious for losing penalty abatement requests. Be sure to follow up on your relief request by calling the IRS. If they have no record of your request, refile it ASAP. You should also ask that they place a collection hold on your account while your request is being reviewed.
Although First-Time Penalty Abatement requests are typically resolved within two to three months, requests for penalty relief due to reasonable cause can take much longer. If an appeal is required, you could be waiting up to a year for a final resolution.
Need assistance with reducing or removing your tax penalties? Call 855-476-6920 to schedule a free consultation with Tax Defense Network today!