IRS Penalties: When the IRS May Waive Them—and Why AI Research Alone May Not Be Enough
IRS penalties can turn a tax dispute into a much larger problem. A taxpayer may already owe additional tax and interest, only to find that the IRS has also asserted penalties for late filing, late payment, negligence, substantial understatement, failure to deposit, or another compliance failure.
The good news is that penalties are not always final. In appropriate cases, the IRS may remove or reduce penalties. The bad news is that penalty relief is technical, fact-intensive, and not automatic. A taxpayer generally must show that the legal standard for relief has been met, and that usually requires more than saying the taxpayer made a mistake or relied on informal guidance.
This issue has become more important as taxpayers increasingly use online tools, automated tax software, and artificial intelligence to answer tax questions. AI can be useful for education and issue spotting, but relying on AI-generated tax research without professional review may not be enough to establish reasonable cause for an IRS penalty.
Penalties Are Separate From Tax and Interest
A tax assessment may include three different components: tax, interest, and penalties.
The tax is the underlying amount the IRS says should have been paid.
Interest generally compensates the government for the time value of money and usually runs from the original due date until payment.
Penalties are different. They are additional amounts imposed for noncompliance, such as filing late, paying late, substantially understating tax, failing to make required deposits, or taking positions that lack sufficient support.
This distinction matters because the IRS has broader discretion to remove certain penalties than it does to remove interest. Interest is often mechanical. Penalty relief, by contrast, may be available if the taxpayer qualifies under an IRS administrative waiver, a statutory exception, reasonable cause, or another recognized ground for relief.
The IRS provides a general overview of penalty relief here: IRS Penalty Relief.
First Time Abate May Be the Easiest Starting Point
One of the most common forms of IRS penalty relief is First Time Abate. This is an administrative waiver that may apply when a taxpayer has a clean compliance history and has not previously been required to file, or has had no penalties for the prior three tax years, and is otherwise compliant.
First Time Abate can apply to certain penalties, including failure-to-file, failure-to-pay, and failure-to-deposit penalties. It is not available for every penalty and does not resolve the underlying tax. But where available, it can be an efficient way to remove penalties without proving reasonable cause.
The IRS explains this administrative relief here: IRS Administrative Penalty Relief.
Taxpayers should be careful, however, not to confuse First Time Abate with reasonable cause. First Time Abate is based largely on compliance history. Reasonable cause is based on the taxpayer’s facts and circumstances.
Reasonable Cause Requires More Than a Good Explanation
Reasonable cause penalty relief generally requires the taxpayer to show that they exercised ordinary business care and prudence but were nevertheless unable to comply with the tax law. The IRS evaluates the taxpayer’s facts, circumstances, efforts to comply, and the reason the failure occurred.
The IRS’s reasonable cause guidance can be found here: IRS Penalty Relief for Reasonable Cause.
Common reasonable-cause arguments may involve serious illness, death, unavoidable absence, fire, casualty, natural disaster, inability to obtain records, reliance on erroneous written advice, or other circumstances outside the taxpayer’s control. The argument must be specific. General statements that the taxpayer was busy, confused, unaware of the rule, or unable to pay are usually not enough.
Lack of funds, by itself, is generally not reasonable cause for failing to file or pay. But the reasons for the lack of funds may matter. For example, if the taxpayer experienced a casualty event, medical crisis, theft, business interruption, or other extraordinary circumstance, the surrounding facts may support relief.
AI Research Is Not the Same as Professional Tax Advice
Many taxpayers now use AI tools to research tax questions. That is understandable. Tax rules are complex, IRS notices can be confusing, and AI tools can provide quick summaries. But there is a major difference between using AI as a research aid and relying on AI as the basis for a tax return position.
For penalty relief, reliance arguments usually require evidence that the taxpayer acted reasonably and in good faith. When a taxpayer relies on a professional advisor, the IRS and courts may examine whether the advisor was competent, whether the taxpayer provided complete and accurate facts, whether the advice was specific to the taxpayer’s situation, and whether the taxpayer actually relied on the advice in good faith.
AI-generated output may not satisfy those requirements. AI tools can misunderstand facts, omit exceptions, provide outdated law, invent citations, or give overgeneralized answers. More importantly, AI does not replace the professional judgment of a qualified tax advisor who reviews the taxpayer’s actual documents and facts.
A taxpayer who uses AI to identify questions to ask an advisor is in a much better position than a taxpayer who uses AI as the final authority for a return position, filing deadline, payment obligation, or reporting decision.
Why “The Software Told Me So” May Not Be Enough
Taxpayers sometimes assume that reliance on tax software, online research, or automated guidance will excuse a penalty. Sometimes it may help. But it is not a complete defense by itself.
The IRS may ask:
What information did the taxpayer provide?
Was the information complete and accurate?
Was the taxpayer using the tool correctly?
Was the issue simple or technical?
Did the taxpayer ignore warnings or inconsistencies?
Did the taxpayer have reason to know the result was questionable?
Did the taxpayer consult a qualified advisor?
Was the position disclosed?
Was there substantial authority?
Did the taxpayer act in good faith?
These questions are especially important for sophisticated taxpayers, business owners, executives, and professionals. The more complex the issue, the less likely it is that generic online guidance will be enough.
Accuracy-Related Penalties Require Careful Analysis
Many tax disputes involve accuracy-related penalties. These penalties may apply to negligence, disregard of rules or regulations, substantial understatement of income tax, substantial valuation misstatements, and other issues.
A taxpayer may have defenses if there was reasonable cause and the taxpayer acted in good faith. In some cases, the taxpayer may also rely on substantial authority, adequate disclosure, or other penalty-defense concepts. The correct defense depends on the penalty asserted and the underlying tax issue.
This is where technical analysis matters. The taxpayer should identify the specific penalty code section, the IRS’s basis for asserting the penalty, the taxpayer’s legal position, the available evidence, and whether the taxpayer had professional advice or other support before filing.
Penalty relief should not be presented as a generic hardship request when the actual issue is a legal defense to the penalty.
Form 843 and Written Penalty Abatement Requests
Some penalty relief requests may be handled by phone. Others require a written request. In many cases, taxpayers may use Form 843, Claim for Refund and Request for Abatement, to request abatement or refund of certain penalties, interest, or other amounts.
A strong written penalty abatement request should generally include:
The tax year or period at issue.
The specific penalty being challenged.
The notice number or IRS account information.
A clear statement of the requested relief.
A factual chronology.
The reasonable-cause explanation.
Documents supporting the taxpayer’s position.
Evidence of ordinary business care and prudence.
A discussion of compliance history, if favorable.
Any legal authority supporting the request.
The taxpayer should avoid vague explanations. The IRS is more likely to consider relief when the request is organized, documented, and tied to the applicable penalty standard.
Documentation Matters
Penalty relief often turns on documents. A taxpayer who claims illness should preserve medical records or caregiver documentation. A taxpayer who claims records were unavailable should document attempts to obtain them. A taxpayer who relied on an advisor should preserve engagement letters, emails, memoranda, tax organizers, invoices, drafts, and written advice. A taxpayer affected by a disaster should preserve insurance records, FEMA notices, photographs, repair invoices, business interruption records, and related correspondence.
For AI-related situations, the taxpayer should be especially careful. If AI output was part of the process, the taxpayer should not overstate its role. It may be more helpful to show that AI was used only as a preliminary research tool and that the taxpayer ultimately sought professional review or relied on specific competent advice.
Professional Advice Still Matters
Reasonable reliance on a qualified tax advisor can be an important penalty defense in appropriate cases. But the taxpayer must generally show that the advisor had the necessary expertise, was given all relevant facts, and provided advice on which the taxpayer reasonably relied.
Professional advice should be specific, documented, and tied to the relevant facts. A casual conversation, generic newsletter, social media post, tax software output, or AI-generated answer may not carry the same weight as a written analysis from a competent advisor who reviewed the taxpayer’s records.
This does not mean every taxpayer needs a formal tax opinion for every issue. But where the tax issue is material, technical, aggressive, unusual, or likely to be scrutinized, written advice can matter.
What Taxpayers Should Do After Receiving a Penalty Notice
A taxpayer who receives an IRS penalty notice should not assume the penalty is correct, but should also not ignore the notice. The first step is to identify exactly what the IRS assessed and why.
Taxpayers should review:
The tax year or period.
The type of penalty.
The amount of tax, penalty, and interest.
The IRS deadline for response.
Whether the return was filed.
Whether the tax was paid.
Whether the IRS records are accurate.
Whether First Time Abate is available.
Whether reasonable cause exists.
Whether the penalty has a legal or procedural defect.
Whether a written request, phone request, appeal, or other response is appropriate.
The IRS page on understanding notices and letters is available here: Understanding Your IRS Notice or Letter.
Deadlines should be taken seriously. Some notices provide appeal rights or specific response windows. Missing those deadlines can limit options.
The Practical Takeaway
The IRS can waive or abate penalties in appropriate cases, but taxpayers should not assume that penalties will disappear automatically. First Time Abate may be available for taxpayers with a clean compliance history. Reasonable cause may apply when the taxpayer exercised ordinary business care and prudence but could not comply because of facts outside the taxpayer’s control. Other penalty defenses may apply depending on the specific penalty and underlying tax issue.
AI tools can be useful for general education and issue spotting, but AI research alone is not a reliable penalty defense. Taxpayers should be careful before relying on automated answers for filing positions, deadlines, payment obligations, or complex tax reporting decisions.
The Karam Firm, PLLC advises individuals, businesses, executives, and professionals on IRS penalty abatement, reasonable cause requests, First Time Abate, tax notices, audits, appeals, refund claims, and tax controversy strategy. If you received an IRS notice assessing penalties, relied on advice that may have been incomplete, or need help determining whether penalty relief is available, contact The Karam Firm for additional information.
This article is for general informational purposes only and does not constitute legal or tax advice. Reading this article or contacting the firm does not create an attorney-client relationship. Penalty relief depends on the specific penalty, facts, tax year, procedural posture, documentation, and applicable law.
