Tax Mistake? Here's a Get Out of Jail Free Card

Taxes are due this year on April 15. But if you're late with your tax return and owe money to the IRS, serious penalties could apply. Similarly, if you owe money to the IRS for 2023 and you don't make your tax payment by April 15, you could be penalized for being late.

Both the failure-to-file and late payment penalties have the potential to cost you a lot. The former will cost you 5% of your unpaid tax debt for each month or partial month your return is late, up to 25% of that total. Meanwhile, the late payment penalty (also known as a failure-to-pay penalty) will cost you 0.5% per month or partial month your payment is late, up to 25%.

But if it's your first time incurring one of these penalties, the IRS may be willing to go easy on you via a process known as first-time abatement. Here's how it works and how to qualify.

When you get a second chance

Under some circumstances, the IRS will agree to waive a penalty for being late with your tax return or for paying your tax bill late. But you'll need to meet certain criteria.

Specifically, you'll need a good tax compliance history, which the IRS defines as:

• You filed your tax return for the past three years before the tax year in which you incurred a penalty
• You didn't receive any penalties during the three years prior to when you're asking for first-time abatement

So here's how this might work. Let's say you submit your 2023 tax return late in 2024, and as a result, you're hit with a failure-to-file penalty. If you didn't incur any penalties for tax returns related to 2020, 2021, and 2022, and you filed all of those returns on time, you may be eligible for first-time abatement for your 2023 tax return.

How to apply for first-time abatement

The IRS isn't going to somehow access your bank account and remove funds from it to collect its penalties. Rather, it's going to notify you in writing that you've incurred a penalty and give you instructions on how to pay it.

That notice will generally have a phone number on it that you can call for further information. That's also the phone number you can call to request first-time abatement.

Otherwise, you can fill out Form 843 and mail it to the IRS. You should also know that if your request for first-time abatement is denied, you have the right to appeal that decision.

In rare cases, the IRS might offer tax abatement proactively to a broad group of filers. For example, the agency announced earlier this year that it would waive $1 billion in late payment penalties for filers who didn't pay on time in 2020 and 2021. But usually, you need to be the one to request abatement.

How to avoid a tax penalty in the first place

The fact that the IRS will sometimes let you off the hook penalty-wise is a good thing. But there are also steps you can take to avoid being penalized in the first place.

First, you can avoid the failure-to-file penalty by submitting your taxes on time or requesting an extension by the filing deadline. So this year, for example, if you don't think you'll be done with your taxes by April 15, just request an extension by then, and you'll get six more months to plug numbers into tax software and file your return (however, be mindful that you won't get extra time to pay your tax bill).

To avoid a late payment penalty, aim to set some money aside in your savings account during the year in case you end up having to write the IRS a check in April. This is an especially important thing to do if you're self-employed and don't have taxes deducted from your earnings regularly.