IRS Penalties: What Triggers Them — and How to Get Them Reduced

Penalties are where a simple oversight turns into real money. The IRS assesses tens of millions of them every year, and most of the taxpayers who pay them never learn that some could have been avoided — or removed after the fact. Here are the five I see most from my desk, what triggers them, and how to fight back.

1. Late filing (failure to file)

Miss the filing deadline with a balance due and the penalty is 5% of the unpaid tax per month or part of a month, capped at 25%. Go more than 60 days past the deadline and a minimum kicks in: for returns required to be filed in 2026, it is the lesser of $525 or 100% of the tax due. This is the most expensive routine penalty in the code — ten times the late-payment rate — which is why my standing rule is: file on time even if you cannot pay.

2. Late payment (failure to pay)

File on time but pay late and the penalty is 0.5% of the unpaid tax per month, capped at 25%. An installment agreement can cut the monthly rate while you pay it down. Filing on time and setting up a payment plan is almost always cheaper than hiding.

3. Estimated tax underpayment

If you are self-employed or otherwise under-withheld, the IRS expects payment through the year via quarterly estimates. Fall short and you get an underpayment charge that works like interest. This is the penalty that quietly bleeds high-earning 1099 contractors — and the one good planning eliminates entirely.

4. Accuracy-related penalty

Substantially understate your income, or claim deductions without a reasonable basis, and the IRS adds 20% of the underpayment. The defense here is documentation and defensible positions — the difference between aggressive and reckless.

5. Failure to deposit employment taxes

Payroll taxes withheld from employees are the IRS's most jealously guarded money. Deposit late and the penalty runs 2% to 15% of the unpaid amount depending on how late. Let it go long enough and the trust fund recovery penalty can reach the owners personally. Never fund the business with payroll withholding.

Getting penalties reduced or removed

Two paths matter:

First-Time Abatement (FTA). If you have a clean compliance history for the prior three years, the IRS can remove failure-to-file, failure-to-pay, and failure-to-deposit penalties. It is request-based — the IRS does not hand it out automatically. You (or your representative) have to ask.
Reasonable cause. Illness, disaster, records destroyed, reliance on bad advice — documented facts that show ordinary care. This is a written case, and writing that case is representation work an enrolled agent, a federally licensed tax practitioner, is licensed to do.

Penalties compound quietly. If a notice is already sitting on your desk, attach it with the paperclip in the chat — we scope and quote the work in writing after intake. For the full penalty-and-relief map, the free Chapter 8 sample of the Guide is the place to start.