Under federal tax law, interest and penalties serve different purposes. Interest is a statutory charge on any unpaid tax (and on assessed penalties) that accrues from the due date of the tax until it is paid in full. The IRS charges interest on unpaid tax and on penalties, compounding daily until the balance is cleared. By contrast, penalties are civil additions to tax imposed for specific failures (e.g. late filing or inaccurate reporting) under the Internal Revenue Code (IRC). Interest is mandatory under IRC §6601, whereas penalties (e.g. IRC §§6651, 6662, 6663, etc.) are discretionary based on taxpayer conduct. Because interest is a compensation for delay rather than a punitive penalty, it is not generally waivable by taxpayer requests. In fact, the IRS openly notes that by law it “cannot remove or reduce interest” unless a penalty itself is abated. In practice, the IRS rarely waives interest at all. In short, interest continues to accrue on any unpaid balance (taxes or penalties) until fully paid, and abatement of interest is allowed only in very narrow, IRS-authorized circumstances.
On the other hand, penalties occasionally can be abated or waived if the taxpayer meets certain legal standards. The IRS offers administrative relief from penalties under prescribed programs. For example, many penalties (such as failure-to-file, failure-to-pay, failure-to-deposit, and accuracy-related penalties) are eligible for abatement if the taxpayer qualifies under these relief provisions. In general, penalties can be removed or reduced if the taxpayer demonstrates ordinary business care and a valid reason for noncompliance, or if the taxpayer has a clean compliance history. In contrast to interest, the IRS explicitly provides avenues such as first-time penalty abatement, reasonable cause relief, and statutory exceptions to eliminate or reduce penalties in whole or in part, when appropriate. Any abated penalty also stops interest from accruing on that penalty going forward.
Penalty Types and Abatement Criteria
Key penalties that commonly affect individual and business taxpayers include:
Failure-to-File Penalty (IRC §6651(a)(1))
This “late filing” penalty is generally 5% of the unpaid tax per month or partial month the return is late, capped at 25%. If the return is more than 60 days late, the minimum penalty is the statutory amount or 100% of the underpayment.
Failure-to-Pay Penalty (IRC §6651(a)(2))
This “late payment” penalty is 0.5% of the unpaid tax per month (up to a 25% cap). If both failures-to-file and -pay apply, the 0.5% is credited against the 5% each month, so the maximum combined penalty is still 25%.
Accuracy-Related Penalties (IRC §6662)
These penalties apply when a taxpayer understates tax due to negligence or a substantial understatement. For individuals, negligence or substantial understatement triggers a 20% penalty on the underpayment (higher rates of 40% or more apply for very large understatements or tax shelters). For corporations and pass-through entities, similar rules apply.
Civil Tax Fraud Penalty (IRC §6663)
If any part of the underpayment is due to fraud, an additional penalty of 75% of the amount attributable to fraud is imposed. (By its terms this penalty is “in addition to any other penalty provided by law” for fraud or failure to file.)
Each of These Penalties is Subject to Possible Abatement Under IRS Policy, But the Standards Differ:
Accuracy-Related Penalties (Negligence/Substantial Understatement)
Even serious penalties like the negligence or understatement penalties may be waived if the taxpayer acted with “reasonable cause” and in good faith. In evaluating reasonable cause for an accuracy-related penalty, the IRS considers factors such as the taxpayer’s effort to report correctly, the complexity of the issue, and the taxpayer’s reliance on professional advice. If a taxpayer provided complete information to a competent advisor and reasonably relied on that advice, or if an honest mistake occurred despite ordinary care, the penalty may be reduced or removed. (In fact, Treasury Regulation §1.6664-4 explicitly provides that the reasonable-cause exception can apply even to the civil fraud penalty under §6663 in extraordinary cases.)
Failure-to-File or -Pay Penalties
The monthly penalties for late filing and payment may be waived if certain conditions are met. Generally, the IRS will consider relief if the taxpayer has a good compliance history or can demonstrate reasonable cause for the delay. For example, if a taxpayer usually files and pays on time or if extraordinary events (illness, disaster, etc.) prevented timely filing/paying, the IRS can abate these penalties. The IRS’s official guidance states: “You may qualify for penalty relief if you demonstrate that you exercised ordinary care and prudence and were nevertheless unable to file your return or pay your taxes on time”.
Civil Tax Fraud Penalty
Because civil tax fraud is considered an intentional wrongdoing, abatement of a fraud penalty is extremely rare. By statute, the reasonable-cause exception even applies to fraud (IRC §6664(c)), but proving fraud by clear and convincing evidence makes any claim of good faith virtually impossible. In practice, if the IRS determines fraud, the taxpayer has no reasonable-cause relief, and first-time abatement does not apply. (Taxpayers facing a fraud penalty should prepare for the maximum consequence – a 75% addition – and consult counsel immediately.) Moreover, if the IRS has the evidence to assert a civil fraud penalty they also have the evidence to criminally prosecute.
First-Time Penalty Abatement (FTA)
The IRS offers First-Time Penalty Abatement (FTA) for non-fraud penalties like failure-to-file, failure-to-pay, and failure-to-deposit. To qualify, the taxpayer must have filed all required returns (or extensions) for the past three years and have no penalties for those years (or have had prior penalties removed for valid reasons other than FTA). For example, a taxpayer with no penalties in 2019, 2020, and 2021 who incurs a late filing penalty in 2022 would qualify for FTA. The penalty amount does not matter, and the taxpayer can request FTA even if the tax is not fully paid; however, interest will continue to accrue until the balance is settled. To request FTA, taxpayers can call the IRS or submit a written request, identifying the return and penalty in question. No extensive documentation is required.
Reasonable Cause Abatement
Beyond FTA, many penalties under §§ 6651 and 6662 can be waived if the taxpayer can show reasonable cause, essentially that they exercised “ordinary business care and prudence” but still failed to comply. Examples include natural disasters, serious illness, inability to obtain records despite diligent effort, or reliance on incorrect IRS advice. Each case is judged on its own merits, and complete abatement stops further interest on the penalty. Taxpayers can call the IRS or file Form 843 to request this relief.
Statutory Exceptions
Some penalties must be waived if certain statutory conditions are met, such as reliance on incorrect written advice from the IRS, timely mailing of a return with proof of postmark, or being affected by a federally declared disaster. These exceptions are codified in the Internal Revenue Code and Treasury Regulations, and the IRS must grant relief if the requirements are satisfied.
Audits, Investigations, and Other Limitations on Relief
Taxpayers should be aware that the results of tax audits and criminal tax investigations can affect abatement eligibility. If an IRS examination concludes that errors on a return were due to negligence or fraud, the resulting penalties generally must stand (absent a viable cause). A finding of willful conduct is particularly adverse: it not only triggers severe penalties (e.g. the 75% fraud penalty) but also demonstrates a lack of “ordinary care,” which destroys any reasonable-cause claim. In practice, a civil tax fraud penalty almost never gets abated because the IRS has already determined intentional wrongdoing. Count yourself lucky if you are not additionally criminally prosecuted for tax crimes.
Criminal tax investigations make abatement even more remote. If a taxpayer is being investigated by the IRS Criminal Investigation Division, it implies the IRS has uncovered evidence of potential fraud or evasion. In that context, the government’s position is that good-faith relief is not appropriate, and penalties (and interest) will not be withdrawn. (Indeed, at conviction, all tax liabilities, interest, and penalties are reinstated or accelerated by statute.). The IRS-CI boasts a conviction rate of 92% in cases it refers to the DOJ for criminal tax prosecution. This high conviction rate underscores that once fraud is suspected, the IRS expects full enforcement of civil and criminal tax penalties.
Even in the absence of fraud, a history of significant disputes or late filings can preclude FTA. For example, if a business regularly files returns late, or a taxpayer has prior penalties (even if abated for other reasons), the IRS will find the compliance record ineligible for “first-time” relief. Similarly, if an IRS audit discloses that the taxpayer ignored IRS notices or repeatedly missed deadlines, arguing reasonable cause becomes very difficult. In short, the more serious or repeated the tax issue, the harder it is to persuade the IRS to waive penalties.
Finally, taxpayers should note that interest abatement is unaffected by most of these factors. Even if a taxpayer has a good reason for penalties, it does not entitle them to interest relief. The two relief processes are mainly independent. Only an IRS personnel error (not the taxpayer’s fault) can remove interest, regardless of how sympathetic the penalty case is.
Contact the Tax Law Offices of David W. Klasing Today
Individuals and business owners alike facing IRS penalties or interest charges should consider seeking professional help. At The Tax Law Offices of David W. Klasing, our dual-licensed Tax Attorneys & CPAs have nearly three decades of experience in handling IRS civil and criminal tax controversies. With deep knowledge of IRC §6404 and the penalty provisions (§6651, §6662, §6663, etc.), we can evaluate your case and pursue all available relief avenues. Whether your case involves simple late-filing penalties or complex accuracy issues under audit, our firm’s dual-qualified lawyers can craft a tailored strategy – from initial abatement requests through appeals or litigation.
While the IRS does allow penalty abatement under first-time, reasonable-cause, and statutory exception rules, interest abatement is only granted for narrow IRS errors (see IRC §6404). Each penalty type (late filing, late payment, accuracy-related, and fraud) has its own criteria for relief, and a taxpayer’s history and behavior can significantly impact eligibility. Given the complexity of these rules and the risk of harsh outcomes in high-risk tax audits or criminal tax investigations, professional representation is crucial. For help with interest or penalty abatement at the IRS, contact the Tax Law Offices of David W. Klasing, where experienced dual-licensed tax attorneys and CPAs can advise you of your rights and pursue the best possible outcome for your case.
Don’t navigate IRS interest and penalty issues alone. Reach out to the Tax Law Offices of David W. Klasing for a confidential, reduced-rate initial consultation. Whether you are an individual or a business, the firm’s tax lawyers and CPAs will analyze your situation, help you document any reasonable cause, and aggressively pursue penalty relief on your behalf. Call us at (800) 681-1295, or visit us online HERE for more information.
