Fighting IRS Penalties: Reasonable Cause, First-Time Abatement, and Supervisory Approval
By Luke Ryan | December 2025
Tax penalties can be as significant as the underlying tax liability itself—and in some cases, even larger. The IRS assessed nearly $23.8 billion in penalties in 2022 alone, affecting millions of taxpayers who filed late, paid late, or made errors on their returns. While penalties serve an important purpose in encouraging compliance, they can also be challenged, reduced, or eliminated when taxpayers have valid defenses or qualify for relief programs. Understanding the types of penalties, the defenses available, and the procedural requirements the IRS must follow is critical for anyone facing a penalty assessment. This article explains how penalties work, when they can be challenged, and how taxpayers can pursue abatement through reasonable cause, first-time penalty abatement, or procedural defenses.
I. Overview of IRS Penalties
The Internal Revenue Code authorizes the IRS to assess penalties for a wide range of compliance failures. The most common penalties fall into three categories: failure to file, failure to pay, and accuracy-related penalties.
a. Failure to File (IRC § 6651(a)(1))
The failure-to-file penalty applies when a taxpayer does not file a required return by the due date (including extensions). The penalty is 5 percent of the unpaid tax for each month (or part of a month) that the return is late, up to a maximum of 25 percent. If the return is more than 60 days late, there is a minimum penalty of $525 (for 2025 returns) or 100 percent of the unpaid tax, whichever is smaller.
This penalty can accumulate quickly. For example, a taxpayer who owes $10,000 and files three months late faces a $1,500 failure-to-file penalty.
b. Failure to Pay (IRC § 6651(a)(2))
The failure-to-pay penalty applies when a taxpayer files a return but does not pay the full amount of tax owed by the due date. The penalty is 0.5 percent of the unpaid tax per month, up to a maximum of 25 percent. If the taxpayer enters into an installment agreement, the penalty rate drops to 0.25 percent per month.
Unlike the failure-to-file penalty, the failure-to-pay penalty continues to accrue as long as the tax remains unpaid, making it critical to pay as quickly as possible or to establish a payment plan to reduce the penalty rate.
c. Accuracy-Related Penalties (IRC § 6662)
Accuracy-related penalties apply when a taxpayer substantially understates their tax liability or makes other errors on their return. The penalty is 20 percent of the underpayment and includes penalties for:
Negligence or disregard of rules or regulations (§ 6662(b)(1))
Substantial understatement of income tax (§ 6662(b)(2))—generally, an understatement exceeding the greater of 10 percent of the correct tax or $5,000
Substantial valuation misstatements (§ 6662(b)(3))
Substantial overstatement of pension liabilities (§ 6662(b)(4))
Substantial estate or gift tax valuation understatements (§ 6662(b)(5))
Accuracy-related penalties are often imposed in audit cases where the IRS concludes that the taxpayer did not exercise reasonable care or made errors that resulted in a significant understatement of tax.
d. Other Penalties
The IRS also assesses penalties for failure to make timely payroll tax deposits (IRC § 6656), failure to file information returns (IRC § 6721 and 6722), fraudulent failure to file (IRC § 6651(f)), civil fraud (IRC § 6663), and numerous other violations. Each penalty has its own rules, defenses, and abatement procedures.
II. Reasonable Cause: The Primary Defense
The most important defense to most IRS penalties is "reasonable cause." Under IRC § 6664(c), a taxpayer will not be subject to certain penalties if the taxpayer shows that there was reasonable cause for the position taken and that the taxpayer acted in good faith.
a. What Is Reasonable Cause?
Reasonable cause is a fact-based determination. The IRS defines reasonable cause as a situation where the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply with the tax laws due to circumstances beyond the taxpayer's control. The determination depends on all the facts and circumstances of the case.
Examples of situations that may establish reasonable cause include:
Serious illness or death of the taxpayer or an immediate family member
Fire, natural disaster, or civil disturbance that destroyed records or prevented compliance
Unavoidable absence from the business or from home
Reliance on erroneous advice from a tax professional (in limited circumstances)
Reasonable reliance on an IRS publication or ruling that later turned out to be incorrect
Inability to obtain records despite reasonable efforts
b. What Is NOT Reasonable Cause?
The IRS has been clear that certain circumstances do not constitute reasonable cause:
Ignorance of the law is not reasonable cause unless the taxpayer exercised ordinary care and the law is complex or unclear
Lack of funds is generally not reasonable cause, though it may be considered if the lack of funds arose from circumstances beyond the taxpayer's control (such as embezzlement or sudden financial crisis)
Reliance on a tax preparer alone is not reasonable cause unless the taxpayer provided all necessary information, the preparer was competent, and there were no indications that the preparer's advice was incorrect
c. Burden of Proof
The taxpayer bears the burden of proving reasonable cause. This means the taxpayer must provide credible documentation and a clear explanation of why compliance was not possible despite the exercise of ordinary care. The more detailed and well-documented the explanation, the better the chances of success.
d. How to Request Reasonable Cause Abatement
Taxpayers can request reasonable cause penalty abatement by:
Calling the IRS at the number on the penalty notice
Submitting a written statement explaining the facts and circumstances
Filing Form 843 (Claim for Refund and Request for Abatement)
The request should be clear, concise, and supported by documentation. For example, if the taxpayer was hospitalized, the request should include medical records showing the dates of hospitalization and explaining how the illness prevented timely filing or payment. Vague or unsupported requests are routinely denied.
III. First-Time Penalty Abatement: The Administrative Waiver
First-Time Penalty Abatement (FTA) is an administrative waiver that provides relief from certain penalties without requiring the taxpayer to prove reasonable cause. FTA is one of the most underutilized penalty relief tools, yet it is remarkably effective for taxpayers with a clean compliance history.
a. What Penalties Are Eligible?
FTA applies to three types of penalties:
Failure to file (IRC § 6651(a)(1))
Failure to pay (IRC § 6651(a)(2))
Failure to deposit payroll taxes (IRC § 6656)
FTA does not apply to accuracy-related penalties (IRC § 6662), fraud penalties (IRC § 6663), or information return penalties. It also does not apply to estimated tax penalties under IRC §§ 6654 and 6655.
b. Eligibility Requirements
To qualify for FTA, a taxpayer must meet three requirements:
Clean Penalty History: The taxpayer must not have been assessed any penalties (other than estimated tax penalties) for the same type of return in the three prior tax years.
Filing Compliance: The taxpayer must have filed all required returns for the current year and the prior three years (or be on an extension).
Payment Compliance: The taxpayer must have paid, or arranged to pay, any tax owed. This includes being on an installment agreement.
If these three conditions are met, the IRS will grant FTA upon request—no proof of hardship or reasonable cause is required.
c. How to Request FTA
FTA can be requested by:
Calling the IRS and stating that you are requesting First-Time Penalty Abatement
Submitting a written request or Form 843
Automatic application (starting with the 2026 filing season, the IRS began automatically applying FTA to qualifying taxpayers)
The IRS does not require taxpayers to use the term "First-Time Penalty Abatement" in their request. If a taxpayer requests reasonable cause relief but qualifies for FTA, the IRS will apply FTA instead.
d. Important Limitations
FTA is available once every three years for the same type of penalty. A taxpayer who receives FTA for a 2023 failure-to-file penalty can receive it again for a 2027 failure-to-file penalty, as long as the three-year clean history requirement is satisfied. However, FTA does not apply to multiple years in a single request—it applies to a single tax year or quarter.
Additionally, FTA does not eliminate interest on the unpaid tax. It only removes the penalty itself. Interest will continue to accrue until the tax is paid in full.
e. Why FTA Is Underutilized
Studies have shown that the IRS approves approximately 80 percent of eligible FTA requests, yet many taxpayers never request it because they are unaware it exists. Tax professionals should routinely evaluate whether their clients qualify for FTA before pursuing more complex reasonable cause arguments.
IV. Supervisory Approval Requirement: A Procedural Defense
In addition to substantive defenses like reasonable cause and FTA, taxpayers can challenge penalties on procedural grounds. The most significant procedural defense arises from IRC § 6751(b), which requires written supervisory approval before the IRS can assess most penalties.
a. What Does IRC § 6751(b) Require?
IRC § 6751(b)(1) provides that "no penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate."
Congress enacted this provision in 1998 to prevent revenue agents from using penalties "as a bargaining chip" to pressure taxpayers into settling. The statute requires that a supervisor review and approve the penalty determination in writing before it is proposed to the taxpayer.
b. Which Penalties Are Excluded?
IRC § 6751(b)(2) excludes two categories of penalties from the supervisory approval requirement:
Penalties for failure to file or pay (IRC §§ 6651, 6654, and 6655)
Penalties "automatically calculated through electronic means"
As a result, the supervisory approval requirement primarily applies to accuracy-related penalties under IRC § 6662, civil fraud penalties under IRC § 6663, and certain other discretionary penalties.
c. When Must Approval Be Obtained?
The timing of supervisory approval has been the subject of extensive litigation. In Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), the Second Circuit held that supervisory approval must be obtained before the IRS loses the discretion to approve or disapprove the penalty. Since then, the Tax Court has imposed increasingly early deadlines for obtaining approval.
In Clay v. Commissioner, 152 T.C. 223 (2019), the Tax Court held that supervisory approval must be obtained before the IRS issues a "30-day letter" proposing the penalty and giving the taxpayer the opportunity to appeal. Approval obtained after the 30-day letter was issued was held to be too late.
On December 23, 2024, the IRS issued final regulations clarifying the timing rules. However, the regulations have been criticized for establishing approval deadlines that are more favorable to the IRS than the Tax Court's case law requires. In October 2025, the Tax Court addressed these issues again in Computer Sciences Corp. v. Commissioner, 165 T.C. No. 8, and Congress is currently considering legislation (H.R. 5346, the Fair and Accountable IRS Reviews Act) to clarify the statute.
d. How to Challenge a Penalty for Lack of Supervisory Approval
To challenge a penalty on § 6751(b) grounds, the taxpayer should request a copy of the IRS's administrative file through a Freedom of Information Act (FOIA) request. The file should contain evidence of written supervisory approval, typically in the form of a signed Civil Penalty Approval Form or similar documentation.
If the file does not contain timely written approval, the taxpayer can raise the § 6751(b) defense in Tax Court or in a refund suit. The IRS bears the burden of proving that supervisory approval was obtained in compliance with the statute.
e. Limitations of the § 6751(b) Defense
The § 6751(b) defense is procedural, not substantive. It does not contest the merits of the penalty—it challenges only whether the IRS followed the correct procedures. If the IRS can demonstrate that approval was obtained at the right time, the taxpayer must still prove reasonable cause or another substantive defense to avoid the penalty.
Additionally, § 6751(b) does not apply to penalties that are automatically calculated, and it does not apply retroactively to penalties assessed before the statute was enacted. Taxpayers should consult with experienced counsel before pursuing a § 6751(b) challenge.
V. Strategies for Penalty Abatement
a. Evaluate FTA First
Before pursuing a reasonable cause argument or a procedural defense, taxpayers should determine whether they qualify for FTA. If eligible, FTA is the simplest and most effective form of penalty relief.
b. Document Reasonable Cause
If FTA is not available, the taxpayer should gather documentation to support a reasonable cause claim. Medical records, insurance claims, correspondence with third parties, and other contemporaneous evidence are critical. The more detailed and credible the documentation, the more likely the IRS will grant relief.
c. Consider Appeals
If the IRS denies a penalty abatement request, the taxpayer can appeal the decision to the IRS Independent Office of Appeals. Appeals Officers have the authority to reconsider penalty determinations and may grant relief where the initial decision was incorrect.
d. Litigate if Necessary
If Appeals does not provide relief, the taxpayer can litigate the penalty in Tax Court (if the penalty is included in a Notice of Deficiency) or in federal district court or the Court of Federal Claims (if the penalty has been assessed and paid). Litigation is expensive, but it may be warranted if the penalty is large and the taxpayer has strong grounds for abatement.
VI. Conclusion
IRS penalties are not inevitable. Taxpayers who understand the available defenses—reasonable cause, first-time penalty abatement, and procedural challenges under § 6751(b)—can significantly reduce or eliminate penalty assessments. The key is to act promptly, document the facts, and present a clear, well-supported case for relief.
For taxpayers facing penalties, the first step is to evaluate whether FTA is available. If not, the next step is to determine whether reasonable cause can be established. Finally, in appropriate cases, taxpayers should consider whether the IRS complied with the supervisory approval requirements of § 6751(b).
Penalties are meant to encourage compliance, not to punish honest mistakes or unavoidable circumstances. Taxpayers who approach penalty abatement strategically—whether through administrative relief, Appeals, or litigation—can protect themselves from penalties that are unjust or improperly assessed.
