The penalty defense that works, and the one that never does

It is relief from a penalty where circumstances beyond ordinary control stopped you complying. The IRS determines it case by case, considering all the facts and circumstances of your situation.

The underlying test asks whether you exercised ordinary care and prudence and still could not comply. So it is about conduct, not about outcome.

The IRS page on penalty relief due to reasonable cause sets out the approach and the examples it recognizes.

The phrase covers a wide range of situations. What unites them is that something outside ordinary control stopped a taxpayer who was otherwise trying to comply.

Several of the ones that matter most to Americans abroad, which is why the argument is worth knowing. The IRS lists failure-to-file, failure-to-pay, accuracy-related and information return penalties among them.

That last category is the one people overlook. Penalties for late or missing international forms sit in it, and those frequently dwarf the tax in a cross-border case.

However, it does not reach everything. The IRS says specifically that reasonable cause does not apply to certain penalties, including the estimated tax penalty.

The IRS publishes examples, and they share a common thread. Fires, natural disasters and civil disturbances appear on the list, as do death, serious illness or unavoidable absence of the taxpayer or an immediate family member.

Inability to obtain records also counts, which matters for cross-border cases. So do system issues that delayed a timely electronic filing or payment.

None of these is a magic phrase. Each one works only where the circumstance actually prevented compliance despite real efforts.

Records held abroad are a common thread in our cases. Where a foreign bank or employer simply would not release figures, say so and evidence the requests you made.

Documents that tie the circumstance to the dates you missed. The IRS asks for things like hospital or doctor letters confirming an illness with dates, disaster documentation, and copies of relevant letters and responses.

Dates are what make or break these claims. A serious illness that ended six months before the deadline explains very little on its own.

So build the timeline first. In our practice we see strong facts fail because nobody connected them to the specific deadline.

Send copies rather than originals, and keep the set you sent. From abroad, replacing a lost document takes considerably longer than it does at home.

Because the IRS treats it as a consequence rather than a cause. It states plainly that, by itself, lack of funds does not excuse a failure to pay or deposit taxes.

What can help is the reason behind the shortage. The IRS acknowledges that other circumstances showing good-faith efforts to comply may still qualify.

So the argument has to go one layer deeper. Explain what happened to the money and why it was beyond ordinary control.

Illness, fraud by a third party or a disaster affecting a business can all sit behind a shortage. It is those facts that carry the argument.

Sometimes, and it depends heavily on the facts. Ignorance of an obligation does not automatically qualify, yet it can form part of a picture where a taxpayer acted sensibly throughout.

Americans who grew up abroad, or who left the United States young, make this argument most often. Their circumstances differ from someone who knew about a duty and postponed it.

Reliance on professional advice can also matter. Where you gave a qualified adviser the full facts and they got it wrong, that differs from never asking anyone.

Explain what you did once you learned of the duty. Prompt action afterwards supports the argument that you took ordinary care throughout.

It is separate relief, granted administratively rather than on the strength of your circumstances. It looks at a clean compliance history instead of at what actually happened to you that year.

The IRS page on First Time Abate sets out the conditions. Where both routes are available, the IRS notes it will apply the administrative waiver.

So check it before drafting a long narrative. A qualifying history can remove a penalty without any argument at all.

Ask about it explicitly when you call or write. It is not always offered unprompted, and it costs nothing to raise.

The formal programs handle penalties differently, and usually far more favorably. The streamlined procedures waive penalties where their conditions are met, rather than asking you to argue anything after the event.

Our guide to streamlined filing explains that package. Where it fits, it is usually a cleaner route than a penalty argument.

This relief then becomes the fallback. It matters where no program fits, or where a penalty notice has already arrived.

In writing, responding to the notice that charged the penalty in the first place. Set out the facts, the dates and the connection between them, then attach the documents that support each one.

You can discuss some penalties by telephone, and the IRS may grant relief that way. For anything substantial, a written record is worth having.

Keep the whole submission. If the first answer is unfavorable, appeal rights exist and the file you built is what supports them.

Keep the letter short and ordered. One page of dated facts beats five pages of explanation every time.

They have their own rules, and the arguments differ. Foreign account reports sit outside the tax code, so relief there follows the rules of that regime rather than the penalty pages you may have read.

Our guide to Form 8938 and the FBAR explains how the two regimes differ. The distinction matters, because people often argue the wrong rules.

Where reports are simply missing, a submission route may remove the exposure without any argument. Our guide to delinquent FBAR procedures covers that option.

Check which regime charged the penalty before drafting anything. The notice itself usually says, and it decides which rules apply.

It does, under a different name and with its own boundaries. HMRC uses reasonable excuse, which GOV.UK describes as something that stopped you meeting an obligation you took reasonable care to meet.

The GOV.UK guidance on reasonable excuses gives examples such as the death of a close relative shortly before a deadline. It also lists what it rejects.

Two exclusions are worth knowing. A payment that failed for lack of money, and finding the online system too difficult, are both rejected explicitly.

Americans in Britain can face both systems at once. The arguments overlap in spirit, though each needs making in its own terms.

On the American side, respond within the period that the notice itself sets out. Leaving it risks collection action starting while the argument is still unresolved, which helps nobody involved.

Britain is stricter about timing. You usually have 30 days from the date HMRC issues a penalty to appeal it, which passes quickly.

So diary both dates the moment a notice arrives. A good argument filed late is worth considerably less than a fair one filed on time.

Yes, and a refusal at the first stage is not the end of it. The IRS has an appeals function that considers penalty decisions independently of the office that made them.

The IRS page on penalty relief sets out the routes available. Deadlines apply at each stage, so read the notice carefully.

Keep everything you sent the first time. An appeal builds on that file rather than starting again from scratch.

Consider whether new evidence has emerged since the first attempt. A refusal based on thin documents can look quite different with dated records attached.

Work through this before writing anything. Most weak claims fail on structure rather than on facts.

Keep the documents and the letter together, since an appeal may need both later.

Take an illustrative example: an American in London misses a filing deadline while caring for a parent through a terminal illness, and files four months late.

Her claim works because the dates line up. Medical letters cover the period, the return went in shortly after the circumstances ended, and she had filed every earlier year on time.

A second taxpayer misses the same deadline because his business had a poor quarter. That argument fails on its own, since lack of funds by itself is not reasonable cause.

Neither taxpayer is unusual. The difference lies entirely in whether the facts connect to the missed deadline.

The first is arguing fairness rather than facts and dates. The test asks what happened and when, not whether the penalty feels proportionate.

The second is omitting the recovery. Showing that you complied promptly once the obstacle cleared is part of demonstrating ordinary care.

The third is ignoring First Time Abate. People draft long narratives for penalties an administrative waiver would have removed.

The fourth is sending a narrative with no documents. Assertions without dates rarely persuade anybody reviewing a file.

We prepare penalty relief requests alongside catch-up filings through our streamlined filing service, including whether a formal route removes the penalty without an argument. Where reasonable cause is the right tool, we build the timeline and the evidence.

If a penalty notice has arrived, send it to us with the background and we will set out the options at a fixed fee agreed first. This article is general information, not personal tax advice; take advice on your own facts from a qualified adviser.