IRS notices arrive at startups more often than founders expect: a late Form 1120, a missed payroll deposit, a mismatched name and taxpayer identification number on a Form 1099. Most can be resolved quickly when someone reads them carefully and responds by the deadline.
Read the notice first
Every notice shows:
- The notice or letter number, usually top or bottom right (for example CP161 for a balance due on a business account, or CP2100/CP2100A for backup withholding on payees whose information did not match)
- The tax form and period
- What the IRS changed or believes is owed
- The response date
The IRS's online notice guide explains each notice number.
Respond on time
- Check the figures against the filed return and payment records.
- If the notice is right, pay or arrange payment before the date shown.
- If it is wrong, respond in writing with support: proof of filing or payment, a corrected calculation, or the reason the change does not apply.
- Keep a copy of everything sent and proof of the date.
A Form 2848 power of attorney lets a representative speak with the IRS for the company.
Types of penalty relief
| Relief | When it applies |
|---|---|
| First-time abatement | No significant penalties in the prior three years, all required returns filed (or valid extensions), and tax paid or arranged |
| Reasonable cause | The company exercised ordinary business care and prudence but could not comply because of circumstances such as a serious illness, disaster or inability to obtain records |
| Statutory exception | Reliance on erroneous written advice from the IRS |
First-time abatement can apply to failure-to-file, failure-to-pay and failure-to-deposit penalties. It is administrative relief: the IRS applies it when the criteria are met, without the company having to prove a reason.
How to request it
- By phone, using the number on the notice, for many straightforward first-time abatement requests
- In writing, in response to the notice
- On Form 843, Claim for Refund and Request for Abatement, when the penalty has already been paid or a formal claim is needed
A worked example
A corporation filed its Form 1120 four months late with a $20,000 balance, its first late filing.
| Item | Amount |
|---|---|
| Failure-to-pay penalty (0.5% per month or part of a month) | $400 |
| Failure-to-file penalty (5% per month or part of a month, up to 25%, reduced by the failure-to-pay penalty for the same months) | $3,600 |
| Interest on tax | Accrues until paid |
| After first-time abatement | Penalties removed; interest on those penalties removed; interest on the tax remains |
Prevention
Most penalties come from missed dates: estimated payments, payroll deposits, information returns and extensions. A single compliance calendar, reviewed monthly, prevents most of them.
We read and answer IRS notices, request penalty relief where it applies, and keep the calendar that prevents the next one.
Sources
- IRS, Understanding your IRS notice or letter
- IRS, Penalty relief
- IRS, Penalty relief due to first-time abatement or other administrative waiver
- IRS, Failure to file penalty
Questions founders ask
Is interest removed when a penalty is abated?
Interest on the abated penalty is reduced along with it. Interest on the underlying tax generally is not abated, except in limited circumstances.
Should a notice be ignored if it looks wrong?
No. Respond by the date on the notice, explaining why it is wrong with support. An unanswered notice usually moves toward assessment and collection.
