Tax Defense ✦ Penalties
Penalties Are Negotiable. Most People Never Ask.
Failure-to-file and failure-to-pay penalties can add 25 percent or more to a balance, and the IRS waives them for taxpayers who ask the right way. North Star Law Firm requests first-time abatement, builds reasonable-cause cases, and challenges accuracy and trust-fund penalties on the merits, for Colorado taxpayers and their businesses, with the parallel Colorado waiver filed at the same time.
Overview
The penalties, and the grounds for removing them
The Internal Revenue Code imposes more than a hundred penalties, but four account for most of what individuals and small businesses pay: failure to file (5 percent per month, up to 25 percent), failure to pay (0.5 percent per month, up to 25 percent), failure to deposit employment taxes, and the 20 percent accuracy-related penalty. Each has defined defenses in the Internal Revenue Manual: first-time abatement, reasonable cause, statutory exceptions, and procedural failures by the IRS such as the missing supervisory approval required by § 6751(b). We read the transcript to see which penalties were assessed and when, then request abatement on every ground that applies.
- First-time abatement requested on every eligible year
- Reasonable-cause requests written with documentation
- Accuracy penalties challenged on substantial authority and § 6751(b)
- Trust fund recovery penalty defended at the Letter 1153 stage
- Denials appealed to the Independent Office of Appeals
- Refund claims filed for penalties already paid
- Colorado penalty waivers requested in parallel
- Penalty exposure reduced going forward with estimated-payment planning
The Common Penalties
What they cost and how they come off
| Penalty | Rate | Primary defenses |
|---|---|---|
| Failure to file (§ 6651(a)(1)) | 5% per month, max 25% | First-time abatement; reasonable cause; return actually filed on time |
| Failure to pay (§ 6651(a)(2)) | 0.5% per month, max 25% | First-time abatement; reasonable cause; installment agreement halves the rate |
| Estimated tax (§ 6654) | Interest-based | Waiver for casualty, disability, or retirement; annualization method |
| Accuracy-related (§ 6662) | 20% of the underpayment | Substantial authority; adequate disclosure; reasonable cause and good faith; missing § 6751(b) approval |
| Failure to deposit (§ 6656) | 2% to 15% | First-time abatement; reasonable cause; deposit designation |
| Trust fund recovery (§ 6672) | 100% of the trust fund taxes | Not a responsible person; not willful; procedural defects in the assessment |
| Colorado late filing / late payment | Up to 30% combined | Good cause waiver through the Department of Revenue |
The Attorney-CPA Difference
We read the transcript before we write the letter.
Penalty relief starts with knowing exactly which penalty was assessed, on what date, for what year, and whether the prior three years are clean. That information is in the account transcript in transaction codes, and it determines whether first-time abatement is available before reasonable cause is ever argued. We decode the transcript, sequence the requests so one approval does not consume the other, and document the reasonable-cause facts the way the penalty handbook requires.
- Transcript review identifies every abatable penalty
- First-time abatement sequenced to preserve reasonable cause for other years
- Documentation assembled to Internal Revenue Manual standards
- Appeals taken when the service center says no
- Colorado waiver filed with the same facts
Questions & Answers
Penalty Abatement questions, answered
What is first-time abatement?
An administrative waiver the IRS grants for failure-to-file, failure-to-pay, and failure-to-deposit penalties for a single year if you have filed and paid on time for the three prior years and are current now. It does not require an excuse, it is not discretionary if you qualify, and it is routinely never requested. It is the first thing we check on every account transcript.
What counts as reasonable cause?
Facts showing you exercised ordinary business care and still could not comply: serious illness, death in the family, records destroyed, reliance on a professional’s advice on a matter of law, or an IRS error. Reliance on a preparer to file is generally not enough under the Supreme Court’s Boyle decision. The request is made in writing with documentation, and it is evaluated against the IRS’s own penalty handbook, which we cite back to them.
Does Colorado waive penalties?
Colorado has its own penalty waiver process and, in practice, is often more willing than the IRS to waive a late-filing or late-payment penalty for good cause, particularly for a first occurrence. Interest is rarely waived by either government. A Colorado waiver request is filed through Revenue Online or with the protest, and we include it whenever a federal abatement is pursued.
Can accuracy-related penalties be removed?
Yes, on different grounds. The 20 percent accuracy penalty under I.R.C. § 6662 is defended on substantial authority, adequate disclosure, or reasonable cause and good faith, and it can be challenged at the audit stage, in Appeals, or in the Tax Court. The IRS must also show written supervisory approval of the penalty under § 6751(b), which it sometimes cannot do.
What about the trust fund recovery penalty?
That one is different: it is not a penalty in the ordinary sense but the personal assessment of unpaid employment taxes against a responsible person under § 6672. It is defended on whether you were responsible and willful, and it is never discharged in bankruptcy. It needs its own strategy, and the time to build it is when the revenue officer sends the Letter 1153, which carries a 60-day protest deadline.
Talk to an attorney-CPA before you talk to the IRS.
A free consultation, a plain-English assessment, and a flat fee in writing if you decide to move forward.