Tax Penalties and Abatements

For many taxpayers, the actual tax owed is not the problem they have when it comes to paying their tax liabilities. Rather, the problem stems from the penalties and interest that continue to accrue daily. IRS penalties and interest can cause a seemingly insignificant tax liability to soar out of control. For example, your unpaid IRS tax liability can double in a matter of a handful of years due to accruing penalties and interest.

The IRS has a multitude of penalties at its disposal which it can assess against taxpayers, some of which are required under the Internal Revenue Code unless specific circumstances apply. For instance, for taxpayers filing income tax returns, there is a penalty for the late filing of the income tax return, a penalty for failing to pay the tax shown as due on the income tax return, and a penalty for the late payment of tax shown as due on the income tax return (and yes, these two penalties are different). Employers may be subject to these same penalties relative to their employment taxes and others, such as failing to deposit the taxes in the specified manner (generally using the Electronic Funds Tax Payment System (EFTPS)). And many more penalties exist that relate to the accuracy of a tax return, regardless of the type of tax or the identity of the taxpayer.

Oftentimes, the IRS will assess penalties against a taxpayer, whether it is a late filing penalty, a late payment penalty, a negligence penalty, or other penalty, when compliance with the Internal Revenue Code is not strictly met. IRS employees who do not understand the facts and law of the case, and who are usually not attorneys themselves, impose penalties based on incorrect assumptions of fact and interpretations of the law. These penalties can add up to be significant amounts and interest accrues on these penalties. When this occurs, it is imperative to fight the IRS.


If you are unfortunate enough to have been assessed a penalty by the IRS or state taxing authority, you may qualify for penalty relief or abatement, based on “reasonable cause” or other circumstances. Reasonable cause is based on all the facts and circumstances in your particular situation, and allows the IRS to provide relief from a penalty that would otherwise be assessed. Some examples that may be considered reasonable cause are the following:

  • Theft or destruction of your records
  • Family problems, such as divorce or death in the family
  • Illness or death
  • Bad advice from a tax advisor, accountant, CPA, or tax attorney
  • Lengthy time of unemployment
  • Substantial financial hardship that prevented you from paying your taxes
  • A disaster that was out of your control (i.e., a hurricane, wind storm, flooding, riot, etc.)

Because proving reasonable cause is fact intensive, being current on case law and administrative guidance is essential.  Our tax advisors can provide the resources and tools to be essential in helping you develop and execute a strategy for removing penalties.

The elimination of excess penalties can lift a huge financial burden off of you. Not all taxpayers qualify for penalty abatement, and penalty abatement is not automatic, but it may be appropriate for you.

At Compass, our tax advisors can assess your tax case to determine if penalty abatement is appropriate for you.