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Hit With a Tax Penalty? The IRS Might Give You a Do-Over

Getting your money back on a first-time IRS penalty is possible, if you know what to do.
Tina Orem
By Tina Orem 
Edited by Chris Hutchison

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The IRS assesses billions in tax penalties each year, but few people know the agency is sometimes willing to change its mind and reverse certain tax penalties.

Two tax pros offer some insights into how the IRS’s penalty-abatement program works and how you may be able to get out of a tax penalty — or even get a refund for one you already paid.

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Qualifying for first-time penalty abatement

If you meet three criteria, you might be able to get the IRS to reverse course on its penalties for not filing a tax return or for not paying on time.

  1. You have to be current on filing your tax returns (it’s OK to have a tax extension).

  2. You have to be current on your tax bill or at least have a payment arrangement in place with the IRS.

  3. You must have a clean record: no penalties for the three tax years before the tax year in which you received a penalty.

“Basically, if you have been in compliance, and you filed on time and you haven't had any penalties in a three-year period, you're allowed to make a mistake,” says John Lyons, a certified public accountant at accounting firm Gorfine Schiller Gardyn in Maryland.

How to apply for penalty abatement

You can ask for first-time penalty abatement by calling or writing to the IRS, Lyons says. If you go the phone route, you might get an answer right away, but be sure to get the agent’s name and number and then follow up with a written letter, he notes. If you've already received an official IRS notice about your penalty, there will likely be a number on the upper right-hand side of the letter that you can call.

And don’t worry about haggling. “It's not a negotiation; it's all or nothing. You either qualify or you don't qualify,” says Jim Buttonow, a certified public accountant in Summerfield, North Carolina.

The IRS may have also tacked interest on to your balance, Buttonow warns. “However, if there's interest that accrues from the failure-to-pay penalty or the failure-to-file penalty that's owed, the associated interest will get abated also,” he says.

News update: On Dec. 19, 2023, the IRS announced its decision to grant approximately $1 billion dollars in penalty relief for certain 2020-2021 tax bills. The agency’s reversal of penalties stems from its 2022 decision to temporarily suspend the mailing of collection notices, which would have reminded taxpayers of outstanding bills and penalties.

The relief, which will be implemented automatically, is applicable to taxpayers with bills totaling less than $100,000. If the taxpayer who received the penalty relief has already paid the penalty, the agency says that it will refund the penalty amount, or credit it toward an existing tax bill if one exists.

You can learn more about the penalty relief on the IRS website.

Fill out IRS Form 843

If you've already paid a penalty and now realize you might be able to get your money back, you’ll want to file IRS Form 843. There, you’ll tell the IRS which penalty you want refunded and why. Typically the IRS allows people to go back two or three years, depending on the circumstances, but sometimes it can be longer.

Be persistent

If the IRS denies your request for first-time penalty abatement but you still think you qualify, you can appeal the decision. You typically have to file the appeal within 30 days of the IRS' rejection. Publication 4576 has more information about the appeals process.

Internal Revenue Service. Publication 4576.

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See if you qualify for other types of penalty relief

If it turns out that you don’t qualify for first-time penalty abatement, you might want to ask for penalty relief “due to reasonable cause,” Lyons notes. Keep in mind, however, that if you incurred a tax penalty simply because you didn’t know the rules or made a mistake, that route probably isn’t for you.

Penalty relief due to reasonable cause is typically only viable for people who have experienced deaths in the family, house fires, medical trauma, natural disasters or other dire situations. You’ll need to provide documentation such as hospital records, court statements or other evidence that supports your claim.

Internal Revenue Service. Penalty Relief for Reasonable Cause. Accessed Apr 7, 2023.

Know when to get help

You’re not required to hire someone to request a first-time penalty abatement for you. If you’re not sure whether you’ve paid any penalties or don’t know how much you owe, you don’t have to pay someone to get that either: You can get your account information from the IRS for free by requesting a tax transcript. But it’s OK to get help from a tax pro. “Unless you speak IRS, it's really difficult to understand this,” Buttonow says.

Either way, challenging a first-time penalty could have its own rewards. “It always is worth pursuing,” he says. “If you don't ask for it, you don't get it.”

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