The IRS Has a Get-Out-of-Penalty-Free Card. Most Business Owners Never Ask for It.

Here’s something I see every year: a business owner gets an IRS notice with a penalty, panics, and pays it immediately. They assume the penalty is final. It usually isn’t.

The IRS has a program called First-Time Abatement — FTA — that removes failure-to-file and failure-to-pay penalties for taxpayers who qualify. It’s been around for years. Most business owners have never heard of it. And as of 2026, if your 2025 return qualifies, the IRS applies it automatically.

First, understand what you’re being penalized for

There are two common penalty types that stack up fast.

Failure to file is 5% of the unpaid tax balance for each month — or partial month — your return is late, up to a maximum of 25%. That’s five months to hit the ceiling. File four months late on a $30,000 bill and you’re looking at $6,000 in penalties before interest.

There’s also a minimum: if you’re more than 60 days late, the IRS charges the lesser of $525 (for 2026) or 100% of the tax owed. Even if you owe $50, the minimum penalty applies.

Failure to pay is smaller — 0.5% of the unpaid balance per month, also capped at 25%. If you’re on an IRS installment agreement, it drops to 0.25% per month. That sounds minor, but it compounds. A $30,000 balance unpaid for 12 months adds $1,800 in failure-to-pay penalties alone.

When both apply in the same month, the IRS doesn’t double-charge you — the failure-to-file penalty gets reduced by the failure-to-pay amount, so the combined rate is still 5% per month, not 5.5%. That’s a technical point, but it matters when you’re reading a notice.

On top of penalties, the IRS charges interest at 7% annually, compounded daily, from the original due date until you pay in full. Interest isn’t abatable. The penalties are.

What First-Time Abatement does

FTA wipes the penalty off the account entirely. If you qualify and the IRS applied a failure-to-file or failure-to-pay penalty — or a failure-to-deposit penalty for employment taxes — FTA removes it.

That $6,000 penalty on the $30,000 late return? Gone, if you qualify. You still owe the $30,000 in tax plus interest. The penalty itself disappears.

The eligibility criteria

FTA is not a free pass for chronic late filers. You have to have a clean three-year history:

• All required returns for the three prior tax years must have been filed (or have a valid extension on record)
• No penalties assessed in those three prior years — or any penalties from that period were removed for a reason other than FTA itself
• The current-year tax is paid in full, or you have an active installment agreement with the IRS

The IRS checks your compliance history automatically. You don’t need to prove anything — they can see your filing and payment record.

New in 2026: automatic application

This is the part most business owners don’t know yet.

Starting with 2025 tax year returns — the ones filed in 2026 — the IRS automatically applies FTA to qualifying taxpayers. If a penalty is assessed on your 2025 return and you meet the three-year clean history test, the IRS is supposed to reverse it without you doing anything.

Monitor your IRS Online Account or your account transcripts after filing. If you received a penalty that should have been removed and it hasn’t been, you can still call the IRS or file Form 843 to request the relief. The automatic system isn’t perfect and it’s new — build in a check.

How to request FTA for prior years (2024 and earlier)

For tax years 2024 and earlier, the automatic application doesn’t apply. You have to ask for it.

Three ways to do it:

1. Call the IRS at the number on the notice. FTA is a well-known program — most agents will process it while you’re on the phone if you meet the criteria. Ask specifically for “First-Time Abatement.”

2. File Form 843 (Claim for Refund and Request for Abatement) if you’ve already paid the penalty and want a refund. You have three years from the return due date to file a claim.

3. Write a letter to the IRS address on the notice citing the First-Time Abatement policy under IRM 20.1.1.

You do not need to include supporting documents. You don’t need to explain yourself. You just need to meet the eligibility criteria and ask.

If you already paid the penalty, you can still get it back

This is worth saying plainly: paying a penalty does not end the matter. If you paid a failure-to-file or failure-to-pay penalty within the last three years and you would have qualified for FTA, you can request a refund via Form 843.

The three-year clock runs from the date of the return that generated the penalty, not from when you paid. Don’t assume you’re past the window without checking.

If FTA doesn’t apply: reasonable cause

FTA requires a clean three-year history. If you have prior penalties on record, FTA won’t work. The fallback is “reasonable cause” — showing the IRS that you had a legitimate reason for the failure.

Reasonable cause isn’t loosely defined. The IRS looks for circumstances beyond your control: a death in the family, a serious illness, a natural disaster, a fire that destroyed records. Relying on incorrect advice from a tax professional can qualify — but you have to show you exercised ordinary business care.

“I forgot” doesn’t qualify. “I was overwhelmed with the business” generally doesn’t either. Reasonable cause takes documentation and it doesn’t always succeed. FTA is cleaner when you can get it.

The bottom line

Most business owners treat IRS penalties as final. They’re not. If your filing history is clean and you received a failure-to-file or failure-to-pay penalty, First-Time Abatement can wipe it out. If your 2025 return triggered a penalty, the IRS should have already removed it automatically — but check your account to confirm.

If you have a prior-year penalty sitting out there and you meet the criteria, ask for it back. Form 843 exists for exactly this reason.

Don’t pay the IRS more than you owe.

This post is for general informational purposes and does not constitute tax or legal advice. Penalty abatement eligibility depends on your individual compliance history. IRS rules and program details may change. Contact a qualified tax professional for advice specific to your situation.