1. Step 1: Review the IRS Penalty Notice before Requesting Relief
The first response should not automatically be filing Form 843 or submitting a reasonable cause letter. Corporate officers should identify the tax period, underlying liability, penalty provision, response deadline, and instructions contained in the IRS notice.
Identify the Penalty and Underlying Tax Issue
Determine whether the notice concerns:
- Failure-to-file penalties under IRC §6651(a)(1)
- Failure-to-pay penalties under IRC §6651(a)(2)
- Failure-to-deposit penalties under IRC §6656
- Accuracy-related penalties under IRC §6662
- Employment tax liabilities that may create separate exposure under IRC §6672
The applicable penalty determines which relief standards and response procedures should be evaluated.
Confirm the Notice Deadline and Current Account Status
Businesses should review the notice for response instructions and determine whether the matter remains at the penalty-assessment stage or has progressed toward collection. A penalty relief request does not automatically suspend IRS collection activity, so collection exposure may require separate attention.
2. Step 2: Check Whether Aep Should Have Applied Automatically
Before preparing a reasonable cause request, businesses should determine whether the penalty should have been prevented through Automatic Exemption from Penalty.
Review the Company'S Prior Compliance History
Beginning with eligible 2025 tax-year original returns and 2026 quarterly returns, AEP may prevent failure-to-file, failure-to-pay, and failure-to-deposit penalties from being assessed when the applicable requirements are satisfied.
AEP generally considers timely compliance during the prior three years or 12 consecutive quarters for quarterly filers. Because AEP is applied during original return processing, qualifying taxpayers ordinarily do not submit a separate application.
Respond When an Eligible Penalty Was Still Assessed
If a business receives a penalty notice but believes the return qualified for AEP, it should review the account and follow current IRS instructions for addressing the assessment. During the transition period, FTA may remain relevant to certain returns that were processed before AEP became applicable.
3. Step 3: Build a Reasonable Cause Record When Automatic Relief Is Unavailable
Businesses that do not qualify for AEP may still seek penalty relief based on reasonable cause when the applicable penalty permits it.
Connect the Evidence to the Compliance Failure
Under Treasury Regulation §301.6651-1(c), the central issue for failure-to-file and failure-to-pay penalties is whether the taxpayer exercised ordinary business care and prudence but nevertheless could not comply on time.
Relevant circumstances may include:
- Destruction of essential records through fire or natural disaster
- Serious illness or death of the person responsible for tax compliance
- Inability to obtain necessary records despite documented efforts
The supporting evidence should establish not only that a disruptive event occurred, but also how that event prevented timely compliance.
Preserve Documents before Contacting the IRS
Businesses should retain correspondence, financial records, internal communications, disaster records, medical documentation when relevant, and evidence showing efforts to meet the tax obligation. The appropriate evidence depends on the asserted basis for relief.
4. Step 4: Choose the Correct Method for Requesting Penalty Relief
There is no single filing method for every IRS penalty-abatement matter. The appropriate procedure depends on the penalty and the instructions accompanying the IRS notice.
Determine Whether to Call, Write, or File Form 843
Depending on the circumstances, taxpayers may request relief by contacting the IRS, submitting a written explanation, or filing Form 843, Claim for Refund and Request for Abatement, when appropriate.
The submission should identify the penalty being challenged, the applicable tax period, the legal basis for relief, and supporting facts.
Separate Penalty Relief from Collection Resolution
Penalty abatement addresses qualifying penalties rather than automatically resolving the underlying tax balance. Businesses with unpaid tax liabilities should separately evaluate collection issues and available payment or dispute procedures.
5. Step 5: Respond to an IRS Denial without Losing Appeal Rights
An initial denial does not necessarily end the administrative process. Businesses should examine the determination letter immediately to identify available review procedures and applicable deadlines.
Prepare an Administrative Protest
When appeal rights are available, the taxpayer may request review by the IRS Independent Office of Appeals. The protest should address the factual and legal grounds for disagreement rather than merely repeating the original request.
Appeal deadlines and procedural requirements depend on the particular notice or determination letter.
Keep Collection Issues on a Separate Track
Seeking penalty relief or administrative review does not universally stop IRS collection activity. Businesses facing collection action should determine whether separate collection remedies or procedural protections are available.
6. Step 6: Prevent the Same Penalty from Recurring
After resolving the immediate notice, businesses should determine why the compliance failure occurred. Repeated violations may eliminate access to administrative relief and create larger financial exposure.
Internal controls should establish responsibility for return preparation, payment authorization, payroll tax deposits, deadline monitoring, and document retention. Companies should also maintain procedures for transferring tax responsibilities when key financial personnel leave or become unavailable.
27 Aug, 2026
