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IRS PENALTY RELIEF

IRS COVID Penalty Abatement: What Is Reasonable Cause and Why Most Businesses Never Filed

May 27, 2025 6 min read

Between 2020 and 2022, the IRS assessed billions of dollars in penalties on businesses that were navigating one of the most operationally disruptive periods in modern American business history. Many of those IRS COVID penalties were assessed on businesses that had entirely legitimate grounds to request abatement. The vast majority never did — and in most cases, they never knew the option existed.

The mechanism is called reasonable cause abatement. It has been part of the Internal Revenue Code for decades. A federal court ruling — Kwong v. United States — has recently changed the legal landscape for businesses pursuing it. This post explains what it is, who qualifies, and why the filing window is real.

What Is IRS Penalty Abatement?

The IRS is authorized to assess penalties for a range of taxpayer failures — failure to file on time, failure to pay on time, failure to deposit payroll taxes, and accuracy-related penalties, among them. Under IRC Section 6651 and related provisions, the IRS is also authorized to remove those penalties when a taxpayer demonstrates that the failure was due to reasonable cause and not willful neglect.

Penalty abatement is not a loophole. It is a formal IRS process with defined criteria. The IRS evaluates each request based on the taxpayer’s specific facts and circumstances. The central question is whether the taxpayer exercised ordinary business care and prudence — and whether the failure to comply resulted from circumstances beyond their control.

IRS penalty abatement is not about proving you tried hard enough. It is about demonstrating that a person of ordinary business judgment, in your specific situation, could not have done otherwise.

What COVID-Era Circumstances Mean for Your Abatement Claim

The 2020 through 2022 period produced a set of circumstances the IRS itself has acknowledged as extraordinary. Businesses faced mandatory governmental closures, supply chain failures, workforce disruptions, cash flow crises tied to delayed PPP and EIDL disbursements, and IRS and Treasury guidance that changed week to week.

These circumstances form the factual foundation for COVID penalty abatement arguments that are more supportable than in any normal tax year. A business that failed to file or pay on time because operations were shut down by government order, key personnel were unavailable due to illness, or cash was frozen pending federal relief disbursements has a materially different factual record than a business that simply didn’t pay attention to its filing obligations.

TWO SEPARATE PATHWAYS
Reasonable cause abatement and First Time Abatement (FTA) are distinct mechanisms. Both may apply to COVID-era penalties depending on your business’s specific situation and compliance history. Both are evaluated as part of the Opscale Exchange eligibility review.

Kwong v. United States — Why This Ruling Matters

In Kwong v. United States, a federal court addressed the legal standard for reasonable cause abatement of IRS penalties in the COVID context. The ruling articulated a framework more favorable to taxpayers than the standard the IRS had been applying administratively — particularly on the reliance-on-advice and ordinary-prudence tests.

The significance of Kwong is not procedural. It is substantive. The decision gives the tax professionals handling your case a stronger legal foundation to build IRS COVID penalty recovery arguments that go beyond what the IRS’s internal administrative process had previously allowed. Applied correctly to your specific factual record, it changes the calculus on claims the IRS previously would have denied.

This is not a form-filing exercise. A successful Kwong-based abatement request is a legal argument built on your facts by a tax professional who understands how to apply the ruling. It cannot be replicated by submitting a generic hardship letter.

First Time Abatement: The Other Mechanism

Separate from reasonable cause, the IRS also provides First Time Abatement (FTA) — an administrative waiver available to taxpayers with a clean three-year compliance history who are assessed a qualifying penalty for the first time. FTA does not require demonstrating reasonable cause. It is available as a matter of IRS policy.

The problem is that the IRS does not proactively apply FTA. You have to request it. A request made too late, in the wrong format, or without awareness of the procedural requirements can be denied on process grounds even when the substantive eligibility is clear. Many businesses that qualified for FTA never collected it because no one filed the request correctly.

Which Penalty Types Qualify

Penalty Type Reasonable Cause First Time Abatement
Failure to File (IRC §6651(a)(1)) ✓Eligible ✓Eligible
Failure to Pay (IRC §6651(a)(2)) ✓Eligible ✓Eligible
Failure to Deposit — Payroll (IRC §6656) ✓Eligible Conditional
Accuracy-Related Penalty (IRC §6662) ✓Eligible Not typically eligible
Information Return Penalty (IRC §6721) ✓Eligible Case-by-case

Which Penalty Types Qualify

The pattern is consistent across businesses that left IRS COVID penalty relief on the table:

  • They paid the penalty because they assumed they were penalty existed as an required to — they did not know abatement option
  • Their CPA advised them to pay and move on — not because abatement was unavailable, but because the CPA did not practice in this area and didn't raise it
  • They were aware of general abatement concepts but did not know about Kwong v. United States or how it applied to their situation
  • They assumed the statute of limitations had closed — in many cases it has not
  • They submitted an abatement request themselves and it was denied because it lacked the substantive legal argument required

Every one of these situations is potentially recoverable — but the window is not unlimited. IRS COVID penalty abatement requests have filing deadlines tied to the assessment date, and the IRS’s posture on COVID-era claims is evolving. Businesses that paid penalties and remain within the filing window have a real opportunity that narrows with each quarter that passes.

Who Qualifies for IRS COVID Penalty Relief

Reasonable cause abatement

Your business was assessed IRS penalties for tax years 2020, 2021, or 2022. You experienced circumstances — government closures, workforce disruption, cash flow constraints, guidance uncertainty — that prevented compliance despite ordinary care. You have not previously received abatement for the same penalty type in the preceding three years.

First Time Abatement (FTA)

Your business has a generally clean IRS compliance history for the three years prior to the penalty year. The penalty is a failure-to-file, failure-to-pay, or failure-to-deposit penalty. You have not previously received FTA for the same penalty type. The request must be made correctly — FTA is not automatic.
FILING DEADLINES ARE REAL
IRS penalty abatement requests must generally be submitted within specific timeframes after the assessment date. If you paid COVID-era penalties and have not yet requested abatement, do not assume the window has closed — but do not assume it stays open indefinitely. An eligibility review will confirm your specific deadlines based on your penalty assessment dates.

What the IRS COVID Penalty Recovery Process Looks Like

Opscale Exchange connects you to tax professionals who specialize in IRS penalty abatement — not general practitioners and not accountants submitting administrative requests. These are attorneys who understand Kwong v. United States, know the IRS’s current posture on COVID-era penalty recovery, and build arguments grounded in your specific factual record.

The process begins with a free eligibility review. You provide information about the penalties assessed, the tax years involved, and the circumstances that led to the noncompliance. The tax professionals Opscale Exchange connects you to will identify which IRS penalty relief pathways apply and give you a clear preliminary determination — including your filing window — before any fees are due.

Common Questions

We already paid the IRS penalties. Can we still get them back through abatement?
In many cases, yes. If your penalty abatement request is approved, the IRS may refund penalties that were previously paid or apply the amount as a credit toward existing tax balances. Eligibility depends on the penalty type, the tax period involved, and whether the request is submitted within the allowable timeframe.
The Kwong v. United States case reinforced the importance of properly evaluating “reasonable cause” claims when taxpayers request IRS penalty relief. The ruling highlighted that taxpayers may still qualify for abatement when they acted responsibly and relied on professional guidance or faced circumstances outside their control.
Reasonable cause abatement is based on specific circumstances that prevented timely compliance, such as serious illness, natural disasters, or reliance on incorrect professional advice. First Time Abatement (FTA), on the other hand, is an administrative relief option available to taxpayers with a clean compliance history, even without showing reasonable cause.
Not always. Many CPAs and tax professionals can successfully handle straightforward penalty abatement requests. However, more complex cases involving large balances, appeals, audits, or disputed IRS findings may benefit from specialized representation or legal guidance.

Find out if your COVID-era IRS penalties qualify for abatement.

The eligibility review is at no cost and gives you a preliminary view of your abatement options, the pathways that apply, and your filing window.
Check My Eligibility
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