If an IRS notice includes penalties, the tax bill often feels a lot bigger than the original tax issue. That is one reason penalty disputes come up so often. In many cases, taxpayers are not only arguing about the amount owed. They are also trying to remove or reduce additions that may have been triggered by a late filing, a late payment, an underpayment, or a reporting issue.
This post walks through nine IRS penalties that taxpayers commonly try to challenge, why those disputes happen, and what kinds of arguments tend to come up. In general terms, the most effective challenges are highly penalty-specific. The IRS treats different penalties very differently, and relief that may be available for one penalty may not exist for another. The agency says reasonable-cause relief is considered case by case, and it also notes that some penalties, including certain estimated tax penalties, are not eligible for reasonable-cause relief in the usual way. IRS penalty relief guidance and IRS penalty appeal guidance
If you are trying to get oriented first, it may help to start with a broader overview of how IRS penalty relief works, including first-time relief and reasonable-cause strategy. That bigger picture matters because a taxpayer might have a plausible challenge to one penalty and no viable challenge at all to another.
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IRS penalties are not one-size-fits-all. Some are automatic and formula-based, while others depend on findings about negligence, substantial understatement, willfulness, or responsibility. The IRS’s Internal Revenue Manual explains that penalty relief depends on the applicable Internal Revenue Code section, Treasury regulations, and the facts and circumstances surrounding the noncompliance. IRS Internal Revenue Manual on penalty relief
That distinction matters because taxpayers often approach penalties with a single broad argument: “I had a good reason.” Sometimes that is relevant. Sometimes it is not. For example:
In other words, the first question is rarely “Can this penalty be challenged?” A better starting point is often, “What kind of penalty is this, and what legal standard applies to it?”
The failure-to-file penalty is one of the most common penalties individual taxpayers try to challenge. The IRS generally imposes it when a return is filed after the due date, including extensions if a valid extension was obtained. The IRS states that the penalty is typically 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. IRS Publication 17 and IRS Internal Revenue Manual on failure-to-file and failure-to-pay penalties
Why taxpayers challenge it:
What often matters here is why the return was late and what records support that explanation. The IRS says reasonable cause may apply when a taxpayer exercised ordinary business care and prudence but was still unable to file on time. IRS penalty relief guidance