Penalties and the interest on them can add a lot to an IRS balance. The good news is that many penalties can be reduced or removed, and the IRS removes the interest tied to a penalty automatically when the penalty comes off. The rules also changed in 2026: the IRS is moving from its long-standing First-Time Abate policy to an automatic exemption for taxpayers with a clean record. Here's how penalty relief works now, based on IRS and Franchise Tax Board (FTB) guidance.
Which penalties can be removed?
The IRS says penalties eligible for relief include: - Failure to file - Failure to pay - Failure to deposit (for employment tax deposits) - Accuracy-related penalties - Information return penalties - Dishonored check penalties - Underpayment of estimated tax (handled under separate rules)
It grants relief in three main ways: First-Time Abate and other administrative waivers, reasonable cause, and statutory exceptions. (IRS: Penalty relief)
The penalties most people see
Failure to file
5% of the unpaid tax for each month or part of a month a return is late, up to 25%. If a return is more than 60 days late, a minimum penalty applies: for returns due after December 31, 2025, it's $525 or 100% of the tax owed, whichever is less. (IRS: Failure to file penalty)
Failure to pay
0.5% of the unpaid tax per month, up to 25%. It drops to 0.25% for individuals who filed on time and have an approved payment plan. It rises to 1% if you don't pay within 10 days of a notice of intent to levy. When both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount. (IRS: Failure to pay penalty)
Interest
Interest isn't a penalty, and the IRS says that by law it can't remove or reduce interest unless the related penalty is removed or reduced. When a penalty is removed, the interest on it comes off too.
First-Time Abate (FTA)
First-Time Abate has been the IRS's most common administrative relief for people and businesses with a good compliance history. According to the IRS: - It covers failure-to-file, failure-to-pay and failure-to-deposit penalties, regardless of amount. - You need a clean three-year history: the same type of return was filed on time for the prior three years (or 12 consecutive quarters), and no penalties were assessed. Estimated tax penalties don't count, and neither do penalties that were later removed for reasonable cause or IRS error. - Businesses have extra conditions: the failure-to-deposit penalty must not have been waived four or more times in that period, and must not have been charged for avoiding EFTPS. - Some situations are excluded, including event-based returns filed once or infrequently.
You have to ask for FTA, but you don't have to name it or send supporting documents. The IRS reviews your account to see whether you qualify. You can call the number on your notice, or send a written statement or Form 843, Claim for Refund and Request for Abatement. (IRS: Administrative penalty relief)
What's new in 2026: Automatic Exemption from Penalty (AEP)
The IRS says FTA is transitioning to a new relief called Automatic Exemption from Penalty (AEP), starting in summer 2026. Here's how AEP works: - It applies to 2025 tax-year returns and later, and 2026 quarterly returns and later. - It's automatic. If you file or pay late but have filed on time and paid the tax due for the prior three years (or 12 consecutive quarters), the IRS doesn't assess the failure-to-file, failure-to-pay or failure-to-deposit penalty in the first place. - It's applied when your original return finishes processing. You'll get a letter explaining that AEP was applied, and you don't need to respond. - Eligible returns include: Forms 1040, 1065 and 1120, employment tax Forms 940, 941, 943, 944 and 945, and Form CT-1. - Failure-to-pay doesn't accrue under AEP. Under FTA, it may keep accruing until the tax is paid.
You're still responsible for the unpaid tax, interest and any penalty AEP doesn't cover. If you get a notice showing a penalty but think AEP should have applied, the IRS says to contact it.
What this means in practice: for 2025 and later returns, people with a clean record may never see the penalty. For 2024 and earlier years, and for anyone who doesn't qualify for AEP, FTA and reasonable cause requests still matter. (IRS: Administrative penalty relief)
Reasonable cause relief
If you don't qualify for FTA or AEP, you can ask for relief based on reasonable cause. You'll need to show you used ordinary care and prudence but still couldn't file or pay on time. The IRS decides case by case. Examples it lists: - Fires, natural disasters or civil disturbances - Inability to get records - Death, serious illness or unavoidable absence of you or your immediate family - System issues that delayed a timely electronic filing or payment
Reasons that generally don't qualify on their own: relying on a tax professional, not knowing the rules, simple mistakes, and lack of funds. The IRS notes that lack of funds alone isn't reasonable cause, but other facts showing you tried to comply may still qualify. Reasonable cause doesn't apply to some penalties, such as the estimated tax penalty. (IRS: Penalty relief for reasonable cause)
How to request penalty relief
- Check the notice. Make sure the penalty and the balance are correct. If the IRS made an error, fixing it may remove the penalty.
- Call the number on your notice. The IRS says some requests can be approved over the phone. Have the notice, the penalty you want removed and your reasons ready. If you ask for reasonable cause but qualify for FTA, the IRS will apply FTA.
- If it can't be approved by phone, request it in writing with Form 843. Explain what happened and when, how it kept you from filing or paying, and what you did to try to comply.
- Include documents, such as hospital or court records, a doctor's letter with dates, disaster documentation, or copies of letters and receipts.
(IRS: Penalty relief; IRS: Penalty relief for reasonable cause; IRS: About Form 843)
If your request is denied
If the IRS denies a written request to remove a failure-to-file or failure-to-pay penalty, you may be able to request a conference or hearing with the IRS Independent Office of Appeals. The IRS says you generally have 30 days from the date of the rejection letter, so check your letter for the exact deadline. (IRS: Penalty appeal)
California: the FTB's one-time penalty abatement
California has its own version. The FTB can grant a one-time abatement of timeliness penalties. Key rules the FTB lists: - It's once in a lifetime, and only for individuals under the Personal Income Tax Law (not estates, trusts or fiduciaries). - It applies to tax years beginning on or after January 1, 2022. - It covers the failure-to-file and failure-to-pay penalties. - To qualify, you must have filed all required returns, never received this abatement before, and paid all other balances in full or be current on an installment agreement. - How to request it: in writing or by phone, through your MyFTB account (chat or secure message), by phone at 800-689-4776, or on Form 2918, One-Time Penalty Abatement – Individual.
You can also ask for relief based on reasonable cause instead. If you've already paid the penalty, the FTB says to send a written statement or Form 2918 as a claim for refund. For reasonable cause refund claims, the FTB has Form 2917. (FTB: One-time penalty abatement; FTB Form 2917)
California penalties are different from the IRS's. For example, the FTB's late payment penalty is 5% of the unpaid tax plus 0.5% per month, for up to 40 months. (FTB: Common penalties and fees)
Common mistakes to avoid
- Paying penalties without asking whether they can be removed. You can still claim a refund later, but it's simpler to ask first.
- Using up California's once-in-a-lifetime abatement on a small penalty when reasonable cause might apply, or when a bigger penalty could come later.
- Asking for relief while returns are still unfiled. FTA and the FTB abatement both require filing compliance. See how many years of unfiled returns to file.
- Writing a vague letter. Reasonable cause requests succeed or fail on specific facts and documents.
- Forgetting the balance itself. Penalty relief lowers the bill but doesn't pay it. Pair it with a payment plan or another resolution. Our overview of three ways to resolve an IRS balance compares the options.
Frequently asked questions
What is IRS First-Time Abate?
It's an administrative waiver that removes failure-to-file, failure-to-pay and failure-to-deposit penalties for taxpayers with a clean three-year compliance history. You ask by phone, in writing or with Form 843. For 2025 and later returns, the IRS is moving to an automatic version called the Automatic Exemption from Penalty.
Does penalty abatement remove interest?
It removes the interest charged on the penalties that are removed. Interest on the underlying tax generally stays, because the IRS says it can't remove interest unless the related penalty is removed or reduced.
Can I get penalties removed if I couldn't afford to pay?
Lack of funds by itself isn't reasonable cause, according to the IRS. You may still qualify for First-Time Abate, or for reasonable cause based on other facts showing you tried to comply.
Can I request penalty relief after I've paid?
Yes. You can request a refund of penalties you paid, generally with Form 843 for the IRS, or with a written statement or Form 2918 for California's one-time abatement. Refund claims have deadlines, so it's best to act promptly.
Does California offer first-time penalty abatement?
Yes. The FTB offers a once-in-a-lifetime abatement of late-filing and late-payment penalties for individuals, for tax years beginning on or after January 1, 2022.
How Tax Resolution Plus can help
At Tax Resolution Plus, our team includes Enrolled Agent Raman Zoobalan, and we work from our office at 2575 McCabe Way, Suite 210, Irvine, CA 92614, and by phone nationwide. With your authorization, we can: - Pull your IRS and FTB account transcripts to see every penalty by year - Check whether First-Time Abate, AEP or California's one-time abatement applies - Prepare reasonable cause requests with the facts and documents the agencies look for - Handle any unfiled returns so you're eligible for relief - Pair penalty relief with a payment plan or other resolution for the remaining balance
We can't promise the IRS or FTB will remove a penalty. That decision is theirs, based on your record and facts. But we'll tell you what's realistic before you file anything. Learn more about our tax resolution services.
Want to know if your penalties can come off? Book a free 30-minute consultation or call (866) 900-9001.
This article is general information, not tax or legal advice. Results vary with each taxpayer's history and facts, and IRS and FTB penalty rules change, so check the linked pages for current details.