IRS Penalty Abatement: How We Helped a Client Remove a $75,000 IRS Penalty
An IRS penalty abatement case can become extremely serious when the penalty reaches $75,000.
Recently, we handled a real case where a U.S. business received an IRS notice showing a $75,000 civil penalty under Internal Revenue Code Section 6038A.
The client had originally been getting tax filing and ongoing compliance handled by another provider. They came to FormLLC after the penalty had already been assessed, specifically seeking help with the large IRS penalty.
We reviewed the situation, worked through the federal reporting issue, prepared the appropriate response, and pursued penalty relief.
The penalty was ultimately removed.
This article explains what happened, what we reviewed, and what we learned from the case.
> This is an anonymized case study. No client name, company name, EIN, address, or other identifying information is disclosed. IRS penalty relief is fact-specific and is not guaranteed.
The Client Came to Us After Receiving the IRS Penalty
The client had been using another service provider for tax filing and ongoing U.S. tax compliance.
FormLLC was not responsible for the client's original tax filing or prior compliance work.
The client approached us only after receiving the IRS notice showing a $75,000 penalty under Internal Revenue Code Section 6038A.
At that point, the immediate question was not who had handled the earlier filing. The priority was to understand the IRS assessment, review the underlying compliance issue, and determine whether there was a legitimate basis to request penalty relief.
We took up the case specifically to help the client address the IRS penalty.
Proof of the $75,000 IRS Penalty
This was not a hypothetical example.
The client received an IRS notice dated August 10, 2026, showing a $75,000 penalty assessment for the tax period ending December 31, 2025.
The notice specifically referenced Internal Revenue Code Section 6038A and showed the penalty amount of $75,000.
Anonymized IRS notice showing the original $75,000 Section 6038A penalty assessment.
All identifying information should be removed before publishing the document publicly.
Why Was the IRS Penalty So High?
Section 6038A contains reporting requirements for certain foreign-owned U.S. corporations and related-party transactions.
Form 5472 is used to report information required under Sections 6038A and 6038C when applicable reportable transactions occur.
The IRS instructions state that a foreign-owned U.S. disregarded entity can also have a Form 5472 filing requirement and generally files a pro forma Form 1120 with Form 5472 attached.
A failure to file Form 5472 correctly and on time can result in a $25,000 penalty. Additional penalties may apply if a failure continues after the IRS sends the required notice.
That is why foreign-owned U.S. businesses should not assume that having no U.S. income tax liability means there are no federal filing obligations.
For more information, see our guide on Form 5472 and Form 1120 for foreign-owned U.S. LLCs.
Our First Step: We Reviewed the IRS Notice
When a client receives a large IRS penalty notice, the first step should not be to panic or immediately pay the amount.
We first reviewed:
- The IRS notice and tax period
- The section of the Internal Revenue Code cited by the IRS
- The relevant federal filing requirements
- The client's filing history
- The applicable Form 1120 and Form 5472 requirements
- The circumstances surrounding the filing issue
- The documentation available to support a penalty-relief request
The objective was to understand why the penalty was assessed and what relief options were available.
We Reviewed the Underlying Compliance Issue
Because we were brought into the matter after the penalty had already been assessed, our first responsibility was to independently review the underlying federal reporting situation.
We examined the available records, the IRS notice, the applicable Form 1120 and Form 5472 requirements, and the circumstances surrounding the penalty.
The goal was to understand the IRS assessment and determine what could be done to properly address the issue and support a request for penalty relief.
Penalty relief is generally stronger when the underlying compliance issue is properly understood and any necessary corrective steps are addressed.
How We Pursued IRS Penalty Abatement
The key part of the process was presenting the case to the IRS with the relevant facts and supporting documentation.
A penalty-abatement request is not simply a request saying:
> "Please remove this penalty."
The IRS states that reasonable cause is determined case by case, based on the facts and circumstances.
A proper request should explain:
- What happened
- When it happened
- Why the filing requirement was not satisfied as required
- What steps were taken to correct the situation
- Why the circumstances support penalty relief
- What documentation supports the explanation
The IRS also provides procedures for requesting penalty relief and may request supporting documentation. :contentReference[oaicite:1]{index=1}
The Result: The $75,000 Penalty Was Removed
After reviewing the case and pursuing the penalty-relief process, the IRS subsequently adjusted the client's account.
The original $75,000 Section 6038A penalty was removed as part of the outcome of the case.
A later IRS notice concerning the Form 1120 account showed adjustments to previously assessed amounts and a remaining balance of $87.26.
*Anonymized IRS notice showing the subsequent adjustment to the client's Form 1120 account.*
The $87.26 shown on the later notice should not be described as the remaining $75,000 penalty. It was the amount shown on the Form 1120 account after the adjustments reflected in that notice.
*Anonymized IRS notice showing the subsequent adjustment to the client's Form 1120 account.*
The $87.26 shown on the later notice should not be described as the remaining $75,000 penalty. It was the amount shown on the Form 1120 account after the adjustments reflected in that notice.
What This Case Taught Us
There are several important lessons for foreign-owned U.S. businesses.
1. A U.S. LLC Can Have Federal Reporting Obligations Even Without Regular Income Tax
A foreign-owned U.S. disregarded entity can have specific reporting obligations under Section 6038A.
The IRS specifically requires certain foreign-owned U.S. disregarded entities to file a pro forma Form 1120 with Form 5472 attached. :contentReference[oaicite:2]{index=2}
2. Form 5472 Should Not Be Treated Like an Optional Filing
Form 5472 is an information return with its own filing requirements.
A business owner may think:
> "My LLC did not make a profit, so there is nothing to file."
That assumption can be dangerous when the entity is foreign-owned and subject to Section 6038A requirements.
3. Do Not Ignore a Large IRS Notice
An IRS penalty notice should be reviewed immediately.
Ignoring the notice can allow additional interest or penalties to accumulate and can make the situation more difficult to resolve.
The IRS itself recommends reviewing the notice, understanding the reason for the penalty, and following the instructions provided. :contentReference[oaicite:3]{index=3}
4. Documentation Matters
A penalty-abatement request should be supported by facts and documentation.
The IRS states that reasonable-cause relief is determined based on the circumstances of each case. :contentReference[oaicite:4]{index=4}
Can Every $75,000 IRS Penalty Be Removed?
No.
There is no guarantee that an IRS penalty will be removed simply because a taxpayer requests abatement.
The IRS evaluates reasonable-cause requests based on the facts and circumstances of the particular case.
The important point is that receiving a large penalty notice does not necessarily mean the taxpayer has no avenue to seek relief.
The correct response depends on the penalty, the underlying filing requirement, the reason for the failure, the taxpayer's history, and the supporting evidence.
What Should You Do If You Receive a Large IRS Penalty?
If you receive an IRS penalty notice involving Form 5472, Form 1120, or another federal filing requirement:
- Read the entire notice carefully.
- Identify the tax year and penalty section.
- Determine which filing or reporting requirement caused the penalty.
- Check whether the underlying filing can be corrected.
- Gather documents explaining what happened.
- Review whether reasonable-cause or another penalty-relief provision may apply.
- Respond within the deadline stated on the IRS notice.
- Keep copies of everything submitted to the IRS.
Do not assume that paying the penalty immediately is the only option, and do not ignore the notice while trying to determine what to do.
Final Takeaway
A $75,000 IRS penalty is serious, but an IRS notice should be treated as the beginning of a review process rather than the end of the conversation.
In our case, we reviewed the notice, addressed the underlying federal reporting situation, prepared the penalty-relief case, and the $75,000 penalty was ultimately removed.
For foreign-owned U.S. businesses, the bigger lesson is prevention: understand the Form 5472 and Form 1120 requirements before an IRS notice arrives.
For more information, read our guides on Form 5472 and Form 1120 for foreign-owned U.S. LLCs, U.S. LLC taxes for Indian founders, and starting a U.S. LLC from India.
*This article is an anonymized case study based on an actual client matter. It is provided for informational purposes only. IRS penalty relief is determined case by case, and past results do not guarantee similar results in another case.*
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Frequently Asked Questions
IRS penalty abatement is the removal or reduction of certain IRS penalties when the taxpayer qualifies for relief under applicable IRS rules. One common basis is reasonable cause, which the IRS evaluates based on the facts and circumstances of each case.
A large IRS penalty can potentially be reduced or removed when the taxpayer qualifies for applicable penalty relief. However, there is no automatic guarantee. The IRS evaluates the specific circumstances, compliance history, corrective actions, and supporting documentation.
Certain failures involving Form 5472 can result in significant penalties. Under Section 6038A, the penalty can be $25,000 for a failure to file a complete and correct Form 5472, with additional penalties potentially applying when a failure continues after the required IRS notice period.
Yes. A taxpayer can seek professional assistance specifically for an IRS penalty matter even if another tax professional or service provider prepared the original tax filing or handled previous compliance work. The new professional can review the IRS notice, underlying records, and available penalty-relief options.
Review the notice immediately, identify the tax period and penalty involved, determine the underlying filing requirement, gather supporting records, and respond within the deadline stated by the IRS. Depending on the circumstances, you may also want to evaluate whether penalty relief is available.
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