Receiving a denial letter from the IRS on your penalty abatement request can feel like hitting a brick wall. But here’s what most taxpayers don’t realize: an initial denial is not the end of the road—it’s often just the beginning of the real process.
As a former IRS agent and current tax attorney, I’ve guided clients through successful appeals after initial denials. In this comprehensive guide, I’ll walk you through exactly what comes next and why you shouldn’t be discouraged when that denial letter arrives.
Understanding the Initial Penalty Abatement Process
Most penalty abatement requests begin with Form 843 (Claim for Refund and Request for Abatement). This is the standard IRS form for requesting penalty relief on already-assessed penalties, whether you’ve paid them or they’re sitting unpaid on your account.
If penalties haven’t been assessed yet, you might request abatement in a different format—perhaps during an audit or in response to a proposed assessment. But for most taxpayers dealing with assessed penalties, Form 843 is your starting point.
Common Grounds for IRS Penalty Abatement
When filing Form 843, you’ll need to explain why the IRS should abate your penalties. The two most common grounds are:
1. Reasonable Cause
Reasonable cause, governed by tax law, regulations, and court precedents, argues that despite exercising ordinary business care and prudence, you still couldn’t comply with your tax obligations. Common scenarios include:
- Serious illness or death in the family
- Natural disasters
- Actions or inactions by your tax professional (in some instances)
- Inability to obtain records due to circumstances beyond your control
The critical element is demonstrating a clear connection between the circumstance and your inability to file or pay taxes on time.
2. First-Time Penalty Abatement (FTA)
First-time penalty abatement is an administrative waiver for taxpayers with clean compliance histories. You generally qualify if you:
- Filed all required returns for the prior three years
- Had no penalties during that period
- Paid all taxes owed (or have a payment arrangement)
First-time abatement can sometimes be requested over the phone, though you may still need to submit Form 843 depending on your situation.
Why Initial Denials Are So Common
Here’s the reality: initial penalty abatement requests get denied more often than you’d expect. I see this constantly in my practice. The IRS sends back a generic letter stating that “the circumstances you described don’t constitute reasonable cause” or “you don’t qualify for first-time penalty abatement.”
But understanding who reviews these initial requests is key. The person reviewing your Form 843 is typically a lower-level IRS employee working through stacks of similar requests. They have:
- Limited time to review each case
- Rigid criteria to apply
- Little flexibility for nuanced situations
- Minimal authority to make judgment calls on borderline cases
They might miss key facts in your documentation, skim through your explanation, or simply lack the sophistication to appreciate the legal merits of your case. This initial review is an administrative screening process—nothing more.
The IRS knows this, which is exactly why they’ve built multiple levels of review into the system. They expect initial denials. They expect appeals. The system is designed for you to challenge that first decision.
The IRS Appeals Process: Your Best Opportunity for Success
When you receive your denial letter, look for information about your appeal rights. Typically, you have 30 to 60 days from the letter date to file a written protest. The formality required depends on the amount in dispute—larger amounts require formal written protests, while smaller amounts may allow informal requests.
Why Appeals Is Different
The IRS Independent Office of Appeals is a completely different environment from the initial review. You’re now dealing with an Appeals Officer—someone with:
- More experience and authority
- A mandate to consider the “hazards of litigation”
- Specific tasking to settle cases and avoid court
- Settlement authority and flexibility
At Appeals, you get a genuine fresh look at your case. The Appeals Officer reviews your original submission but also considers:
- Additional documentation you provide
- Stronger legal arguments
- Explanations of why the initial determination was incorrect
You’re entitled to a conference with the Appeals Officer (in person, by phone, or video) where you can walk them through your case in detail.
Appeals Success Stories
I’ve had numerous cases where initial denials get completely reversed at Appeals. Sometimes the original reviewer missed something obvious. Other times, the Appeals Officer simply has a better understanding of how reasonable cause works in real-world situations.
Even if Appeals doesn’t grant everything you requested, they have settlement authority. They can:
- Partially abate penalties
- Compromise on what constitutes reasonable cause for certain periods
- Work with you to find a reasonable resolution
The key point: Appeals is an independent office within the IRS. They’re not rubber-stamping the initial decision—they’re conducting a genuine de novo review of your case.
When Appeals Doesn’t Work: Taking Your Case to Court
Let’s say Appeals also denies your request or offers an unacceptable settlement. You still have options: litigation.
Depending on your situation, you might litigate in:
- U.S. Tax Court (for certain penalty types)
- Federal District Court (generally requires paying first)
- Court of Federal Claims (for refund claims)
The specific venue depends on factors like whether you’ve paid the penalties, the penalty types involved, and your case’s procedural posture.
Litigation as Leverage
Here’s what’s crucial to understand: the IRS knows cases can go to court, and they know they don’t always win. When you have:
- A legitimate reasonable cause argument
- Solid documentation
- A sympathetic fact pattern
The IRS faces genuine litigation risk. This creates leverage even if you never actually file a lawsuit. The mere possibility influences how Appeals handles your case. They’re evaluating the “hazards of litigation”—the likelihood you might win in court—at every step.
If you do end up in court, you’re getting review from an actual judge who applies the law to your facts without the institutional bias that can affect IRS decision-making. The court system has produced many taxpayer-favorable reasonable cause precedents.
Litigation is expensive and time-consuming, so you shouldn’t plan on going to court over every penalty case. But knowing that path exists—and knowing the IRS knows it exists—fundamentally changes your case dynamics.
The Bottom Line: Initial Denials Are Just Chapter One
You filed your Form 843, made your best case for penalty abatement, and got denied. Should you worry? Absolutely not.
That initial denial is just one data point in a multi-stage process. In fact, when I receive a denial letter for a client, I’m often excited—because now we can move to Appeals, where an independent officer will take a fresh look with settlement authority and consideration of litigation hazards.
The system is designed this way intentionally. The IRS processes millions of penalty abatement requests annually. They can’t conduct exhaustive reviews at the initial stage, which is precisely why appeal rights exist.
Action Steps After Receiving a Denial
If you receive a penalty abatement denial letter:
- Don’t panic—read the letter carefully
- Understand your appeal rights and deadlines
- Exercise those rights within the timeframe given
- Gather additional documentation if needed
- Strengthen your legal arguments
- Present your case to someone with more authority and flexibility
I’ve seen cases that looked hopeless after initial denial turn into complete victories at Appeals. What seemed like an insurmountable obstacle often becomes a negotiated settlement once litigation risk becomes apparent or once facts and law are more fully developed.
The initial denial is not the end of your story—it’s often just the end of chapter one.
Need Help With Your IRS Penalty Abatement Appeal?
If you’re dealing with a penalty abatement case and need help navigating the appeal process or evaluating your litigation options, Boss Tax Law specializes in IRS penalty disputes. As a former IRS agent, I understand how the agency thinks and how to position your case for success at every stage.
Contact us today to discuss your penalty abatement appeal strategy.