Small Business Owner Who Removed $28,000 in Penalties
Educational Example — Results Vary. This is a composite, illustrative scenario for educational purposes only. It is not a real client, not a testimonial, and not a promise of any outcome. Every tax situation is different; consult a qualified professional about your own circumstances.
Situation
A retail small business owner fell behind during a single rough year and ended up with an $89,000 balance. When she finally pulled her transcripts, roughly $28,000 of that was penalties — failure-to-file and failure-to-pay — stacked on top of the actual tax. Before that year, she had filed and paid on time for a long stretch.
The IRS Problem
The tax itself was real, but a third of the balance was penalties driven by one bad year. Her long clean record beforehand made her a strong candidate for First-Time Abatement, which the IRS grants to taxpayers who slip after a sustained period of compliance. The challenge was simply identifying the opportunity and requesting it correctly.
Risks if Ignored
- Paying or financing penalties that could have been removed.
- Continued failure-to-pay penalty accrual until the balance is addressed.
- Collection action on the full inflated balance, including penalties.
- Missing the clean-history window that makes abatement available.
Based on: A balance inflated by penalties, with an otherwise clean compliance history
When penalties make up a large share of a balance, abatement can meaningfully reduce it. First-Time Abatement rewards taxpayers who were compliant before a single slip.
- Bank levy authority now exists.
- A lien may hit your credit.
- Your Offer in Compromise window is narrowing.
Resolution Path
- 1Pull account transcripts to separate tax, penalties, and interest by period.
- 2Confirm a clean compliance history for the three years before the penalized year.
- 3Request First-Time Abatement for the eligible period's penalties.
- 4Address the remaining tax through full payment or an installment agreement.
- 5Set reminders and reserves so the next filing and payment stay on time.
Key Lessons
- Always read your transcripts — penalties can be a large, removable slice of a balance.
- First-Time Abatement rewards a clean prior record; it's worth checking before you pay.
- Abatement applies to penalties, not the underlying tax or (usually) interest.
- Reasonable-cause abatement is a separate option when First-Time relief doesn't apply.
How much of a tax balance can penalty abatement remove?
It depends on how much of the balance is penalties. First-Time Abatement can remove failure-to-file and failure-to-pay penalties for a single period if you had a clean compliance history for the prior three years. It does not touch the underlying tax or, usually, the interest — but on penalty-heavy balances the reduction can be substantial.
Relevant Resolution Options
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Who qualifies for First-Time Penalty Abatement?
Taxpayers who filed and paid on time (or were on an arrangement) for the three years before the penalized period, and who are current on filings now. It applies to failure-to-file and failure-to-pay penalties for one period.
Does abatement reduce the tax I owe?
No. Abatement removes qualifying penalties, not the underlying tax. Interest is generally only reduced to the extent it was charged on the abated penalties.
What if I don't qualify for First-Time relief?
You may still request reasonable-cause abatement if circumstances like serious illness, a disaster, or reliance on incorrect professional advice caused the failure. It requires documentation and is decided case by case.
Romy Cruz, EA
Licensed Enrolled Agent
Licensed Enrolled Agent (EA) · 15 Years IRS Tax Resolution
Romy helps individuals and businesses resolve IRS tax issues including liens, levies, installment agreements, penalty relief, and offers in compromise.
Content is reviewed periodically for accuracy and updated to reflect current IRS guidance and regulations.