IRS Tax Penalty Relief

Federal Tax Attorneys Assisting High-Income Clients with Securing IRS Penalty Relief

High-income taxpayers accused of underpaying their federal tax liability can face substantial penalties from the Internal Revenue Service (IRS). Under the federal tax code, interest and penalties begin to accrue immediately upon delinquency, and the estimated tax penalty can climb to as much as 25% of the unpaid tax return.

However, penalty relief is available in some cases. At Oberheiden P.C., our federal tax attorneys assist high-income clients with securing penalty relief from the IRS. We also help our clients consider alternatives to seeking penalty relief, as various alternatives can prove more advantageous depending on the circumstances.

3 Types of Penalty Relief Available from the IRS

The IRS currently administers three penalty relief programs. Each of these programs provides relief from IRS-imposed penalties under various specific circumstances, and it is critical that taxpayers accurately assess their eligibility to appeal a penalty relief (for reasons discussed in greater detail below). These programs provide relief from penalties imposed due to the following:

• Failure to file federal tax returns
• Filing inaccurate federal tax returns
• Failure to deposit employment taxes
• Failure to pay federal income tax
• Underpaying federal income tax

Generally, IRS penalties are percentage-based, with taxpayers beginning to accrue penalties monthly based on the amount they owe within the tax year. However, minimum (and maximum) penalty amounts also apply in some cases. Interest accrues on IRS penalties as well, and, as a result, accurately assessing taxpayers’ liability can prove challenging in many cases.

However, the IRS makes clear that this is not an excuse for non-compliance and routinely pursues enforcement actions to collect penalties owed. In 2024, the IRS also clarified that it prioritises high-income taxpayer enforcement going forward. With this in mind, high-income taxpayers cannot ignore their penalty liability and should instead work with experienced tax counsel to evaluate their available options. These options may include:

1. Administrative Waiver

The IRS provides administrative waivers for failure to file penalty, failure to deposit, and failure to pay penalty in some cases. As the IRS explains, “[a]n administrative waiver provides relief from specific penalties under certain conditions. . . . [and] First Time Abate is the most common administrative waiver for individuals and businesses.”

As its name suggests, the First Time Abate administrative waiver is available to taxpayers who “hav[e] a good tax compliance history.” To qualify, a taxpayer must have filed the same type of return that triggered the penalties in question for at least the past three years and must not have incurred any penalties during these tax years.

2. Reasonable Cause

The IRS also offers tax penalty relief based on “reasonable cause.” The IRS considers penalty relief requests based on reasonable cause on a case-by-case basis; and, to qualify for relief, taxpayers must be able to demonstrate that they, “exercised ordinary care and prudence and were nevertheless unable to file [a] return or pay [their] taxes on time.” The IRS provides a non-exclusive list of examples of “valid” reasonable cause that includes:

• Death or serious illness of the taxpayer or an immediate family member
• Issues with the IRS’s filing systems
• Inability to access necessary records despite reasonable efforts
• Natural disasters and civil disturbances

In contrast, the IRS specifically states that the following, “don’t generally qualify as valid reasons,” for federal tax law violations:

• Mistakes and oversights
• Lack of knowledge of the law
• Lack of access to funds to pay taxes when due
• Reliance on the advice of a tax professional

These lists are highly instructive, and they highlight the limited nature of the “reasonable cause” exception to federal tax penalty liability. Even if you relied on your CPA or tax counsel when making decisions about your federal tax obligations, this does not exempt you from paying penalties under the Internal Revenue Code.

3. Statutory Exception

The IRS also recognizes a limited list of statutory exceptions to penalty liability for U.S. taxpayers. These exceptions include:

• Relying on specific tax advice from the IRS
• Incurring penalties despite timely mailing or e-filing a return
• Living in a federal disaster area at the time a return or payment is due
• Being involved in military operations in a combat zone when a return or payment is due

The first exceptions apply to a written IRS notice or letter that a taxpayer receives from the IRS in response to a specific inquiry. It does not apply when taxpayers rely on information the IRS publishes online, even if it is incorrect or misleading. In any case, if you believe that you may be eligible for a statutory exception, you should consult with an experienced federal tax attorney who can help you decide if seeking relief is the best option you have available.

Put our highly experienced team on your side

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

Government Consultant

Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

Is Seeking Penalty Relief Your Best Option?

Due to the limited circumstances in which IRS tax penalty relief is available, seeking penalty relief simply isn’t an option for many high-income taxpayers who are facing substantial penalty liability. Additionally, even for those who qualify, seeking penalty relief isn’t necessarily their best option for dealing with the IRS. Depending on the circumstances presented, some potential alternatives to seeking penalty relief include:

Filing an Amended Return

Before filing for penalty relief, it may be worth engaging experienced tax counsel to reassess the accuracy of the returns that triggered the penalties in question. If your penalty liability is based on an inaccurate calculation of your federal tax liability—or if you qualify for credits or deductions that you haven’t claimed—then you may be able to resolve your situation while also preserving your future eligibility for first-time penalty abatement.

Filing an IRS Audit Appeal

If you are facing penalties following an unfavorable IRS audit, your next step could be to file an IRS audit appeal. When conducting audits, revenue agents can (and do) make mistakes—so you should not assume that the IRS’s determination of your tax liability is accurate. This is especially common in complex audits targeting high-income taxpayers.

Filing a Voluntary Disclosure

If you are liable for IRS penalties due to a willful violation of the Internal Revenue Code, you may need to consider a voluntary disclosure. IRS Criminal Investigation (IRS CI) administers its Voluntary Disclosure Practice with a focus on resolving substantial tax controversies with potential criminal implications.

Settling with the IRS

Another option is to focus on settling your tax debt with the IRS. Regardless of whether you qualify for IRS tax penalty relief, negotiating a settlement could ultimately result in the greatest net reduction in your tax liabilities. At Oberheiden P.C., we have extensive experience representing clients in federal settlement negotiations—including settlement negotiations with the IRS.

Seeking Penalty Relief from the IRS Can Be Risky

Importantly, seeking penalty relief could be risky if the IRS is not yet aware of your filing or payment deficiency. The IRS is not required to grant penalty relief, and, in many cases, the IRS has discretion to determine whether relief is warranted (including cases involving relief requests based on “reasonable cause”). If the IRS denies your penalty relief request, you could face an audit or investigation—which could substantially increase your financial exposure.

FAQs: Request Penalty Relief from the IRS

Discuss Your Options with an IRS Penalty Relief Attorney at Oberheiden P.C.

If you need to know more about the IRS’s penalty relief programs and the alternatives available, we invite you to contact us. Please call 888-680-1745 or contact us online to schedule an appointment with a senior attorney at Oberheiden P.C.