Potential Relief for Resolving IRS Penalty Notices

Taxpayers that file or pay their return late likely will receive a penalty notice from the IRS. Many times, however, opportunities exist to seek relief from IRS penalties. The type of relief available varies greatly and depends on a taxpayer’s unique set of circumstances.

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A qualified tax adviser can help identify options for seeking penalty relief from the IRS and how best to demonstrate to the IRS that relief should be granted.

Following are types of relief that might be available to avoid late filing and payment penalties.

Disaster relief

The IRS has the authority to issue guidance to postpone certain federal tax deadlines to provide relief to taxpayers affected by a federally declared disaster. This relief postpones certain federal tax deadlines, including individual and business filing and payment deadlines. A complete list of disasters for which the IRS has granted disaster relief can be found on the IRS website.

Recently, individuals and businesses affected by hurricanes Helene and Milton and that previously extended the filing date for their 2023 income tax returns until Oct. 15, 2024, received a postponement until May 1, 2025, for the federal income tax filing deadline. This relief also postpones the payment of employment tax deposits and estimated tax due on or after the date of each hurricane (Sept. 22 for Helene and Oct. 5 for Milton) until May 1, 2025. However, disaster relief for Hurricane Helene and Hurricane Milton does not cover 2023 income tax payments that were due on April 15, 2023.

Additionally, while the IRS provides automatic relief to taxpayers with addresses within federally declared disaster areas, IRS disaster relief also applies to taxpayers located outside of a disaster area if their tax-related books and records or tax return preparer is located in a disaster area.

Reasonable cause relief

The IRC and U.S. Department of the Treasury regulations provide relief from certain failure-to-file and failure-to-pay penalties if a taxpayer demonstrates that the failure was due to reasonable cause. The precise criteria for reasonable cause vary depending on the penalty, and additional requirements, like whether the taxpayer acted in good faith or without willful neglect, could apply.

The availability of reasonable cause relief and the IRS’ determination of whether a particular taxpayer qualifies for reasonable cause relief is made on a case-by-case basis and is highly dependent on the taxpayer’s specific facts and circumstances. Generally, a taxpayer will qualify for reasonable cause relief if they are able to demonstrate that they acted reasonably and in good faith, which generally means that the taxpayer exercised ordinary business care and prudence in attempting to comply with their tax obligation but was nevertheless unable to comply.

First-time abatement

Penalty relief under the IRS’ first-time abatement (FTA) program is available to all taxpayers that qualify. FTA relief might be available to abate the failure-to-file and failure-to-pay penalties under IRC Section 6651, the failure-to-file partnership and S corporation return penalties under IRC Section 6698 and IRC Section 6699, the failure-to-deposit penalty under IRC Section 6656, and, under certain circumstances, the IRC Section 6038 penalty for failure to file Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” and Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.” FTA cannot be used to abate IRC Section 6721 and IRC Section 6722 penalties for failure to timely file and furnish information returns such as Form 1099s.

FTA relief availability depends on a taxpayer’s specific facts and circumstances, but FTA generally is available to taxpayers that have exhibited a history of tax compliance for the previous three years. A penalty that has been removed for reasonable cause is not treated as noncompliance for purposes of determining compliance over the three-year period, while a penalty removed because FTA relief was granted is treated as noncompliance. IRS telephone representatives often grant FTA relief over the telephone.

Late returns could mean late elections

For many taxpayers, failure to file their return by the due date means not only facing penalties but also failing to make elections that were required to be filed on a timely return. Like penalty relief, relief for late elections also might be available.

Under Treasury Regulation Section 301.9100-2, taxpayers can obtain automatic relief for many late elections if the taxpayer takes timely corrective action, which can mean filing an amended return with the election properly made within six or 12 months from the due date of the return.

Additionally, various IRS revenue procedures provide automatic late election relief. These revenue procedures offer late election relief for common elections, such as electing S corporation status, and provide instructions for obtaining relief.

If relief under Treasury Regulation Section 301.9100-2 or a revenue procedure does not apply, a taxpayer might be eligible for late election relief under Treasury Regulation Section 301.9100-3, referred to as 9100 relief. Taxpayers seeking 9100 relief must submit a request for a private letter ruling to the national office of the IRS Office of Chief Counsel, pay a user fee, and submit a detailed request showing that they acted reasonably and in good faith and that the government will not be prejudiced if relief is granted.

Looking ahead

Many types of relief might be available to taxpayers that were unable to timely comply with certain federal tax obligations. The types of relief available and the best option for a taxpayer will depend on a taxpayer’s unique circumstances. Determining eligibility for relief and following instructions for claiming relief often can be very complex. Taxpayers should consult with their tax advisers to determine whether relief is available and the best course of action for their particular situation.