IRS penalty abatement: how late-filing penalties can be removed

A penalty notice is not the end of the conversation. The IRS has formal routes for removing or reducing penalties, and people abroad, who often had no idea a form existed, are frequently well placed to use them. One point about how we work: we prepare the computations and the written statements; the request goes in under your name, because we do not act as your representative before the IRS.

The penalties people abroad meet

• Failure to file: 5% of unpaid tax per month, up to 25%.
• Failure to pay: 0.5% per month, up to 25%.
• FBAR: non-wilful up to the inflation-adjusted US$10,000 per report (per Bittner); wilful far higher.
• Forms 5471, 8938, 8865: US$10,000 per form, rising after notice.
• Forms 3520/3520-A: 35% of the amount, or 5% a month to 25% for gifts.

Route 1: first-time abatement

An administrative waiver for failure-to-file, failure-to-pay and deposit penalties where you have a clean three-year history: all returns filed, tax paid or arranged, no penalties in the previous three years. It is often granted on request, by phone or in writing, for one year at a time. It does not cover information return penalties.

Route 2: reasonable cause

Available for most penalties where you exercised ordinary business care and still could not comply. Grounds that are taken seriously: documented reliance on a professional who had the full facts and advised incorrectly; serious illness or bereavement; events outside your control; and, for obscure international forms, genuine and objectively reasonable unawareness. "I didn't know" on its own rarely works; a dated account of what you understood, who told you, and when you found out does.

Route 3: statutory exceptions

Disaster-area relief, reliance on written IRS advice (section 6404(f)) and certain hardship cases remove penalties by law rather than discretion.

International information returns

• Delinquent International Information Return Submission Procedures: file the missing Forms 5471, 3520, 8938 and similar with reasonable-cause statements where no income was unreported.
• Streamlined Foreign Offshore: where income and returns were also missed; if accepted, no penalties for people living abroad.
• Voluntary Disclosure Practice: where conduct may have been wilful.

How a request is made

By phone for first-time abatement; in writing on Form 843 or in response to the notice for reasonable cause, with the statement and evidence attached; through the Independent Office of Appeals if refused. Respond within the notice deadline and keep copies. Interest keeps running while a request is considered.

FBAR penalties

These are assessed under the Bank Secrecy Act and handled through the IRS's FBAR process rather than the income tax penalty routes. Reasonable-cause arguments are still made, and the per-report limit from Bittner matters.

Frequently asked questions

Does asking for abatement trigger an audit?

Not in itself. Where the request accompanies a large disclosure of previously unreported income, the wider position gets more attention, which is why the route is chosen before anything is filed.

Can penalties be removed if I still owe tax?

Yes. The penalty and the tax are separate; paying the tax does not prevent abatement and abatement does not reduce the tax.