Reasonable cause and good faith penalty exceptions allow the IRS to waive penalties (e.g., for failure to file, pay, or accuracy-related issues) if a taxpayer acted with ordinary business care and prudence but was unable to comply due to circumstances beyond their control. Examples include natural disasters, serious illness, death, or reliance on professional advice.
Reasonable cause is based on all the facts and circumstances in your situation. The IRS will consider any reason which establishes that you used all ordinary business care and prudence to meet your federal tax obligations but were nevertheless unable to do so.
Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.
Exceptions to the 10% early withdrawal penalty on retirement accounts (like IRAs and 401(k)s) include withdrawals for specific reasons like unreimbursed medical expenses (over 7.5% of AGI), health insurance premiums during unemployment, higher education costs, qualified first-time home purchases (up to $10k), birth/adoption (up to $5k per child), death, or total and permanent disability; also, Substantially Equal Periodic Payments (SEPPs), IRS levies, and certain military reservist distributions. Some employer plans allow penalty-free withdrawals after separating from service at age 55 (or 50 for public safety), and certain recent changes allow for emergency expenses and domestic abuse victim relief.
The most significant factor in determining whether a taxpayer has reasonable cause and acted in good faith is the taxpayer's effort to report the proper tax liability.
Exceptions to the underpayment penalty
Became disabled and had reasonable cause to underpay. Retired in the past two years after reaching age 62 and had reasonable cause to underpay. Went through an unforeseen circumstance, such as a local disaster or a casualty.
Common examples of reasonable cause include death or serious illness of the taxpayer or an immediate family member, natural disasters, and reliance on a tax professional.
To avoid the 10% early withdrawal penalty on retirement funds (like IRAs or 401(k)s) before age 59½, you must qualify for an IRS exception, such as using the Rule of 55 for 401(k)s if you leave your job in or after the year you turn 55, taking Substantially Equal Periodic Payments (SEPP) (Rule of 72(t)), using funds for qualified higher education expenses or a first-time home purchase, or due to total and permanent disability, unreimbursed medical expenses, or birth/adoption. The penalty applies to the taxable portion of the withdrawal, but regular income tax is always due.
These exceptions may include terminal illness, disability, and qualified adoptions to name a few. However, there are two major exceptions to this early withdrawal penalty that we frequently encounter: separation from service and substantially equal period payments (SEPPs).
Reasons to withdraw from a 401(k) generally fall into urgent financial needs (hardship withdrawals like medical bills, preventing foreclosure, funeral costs, education) or specific penalty-free exceptions (birth/adoption, disability, disaster recovery, military, leaving job at 55+), but all early withdrawals are usually taxed as income, with penalties applying unless an exception is met, significantly impacting future retirement savings.
A reasonable excuse is something that stopped you meeting a tax obligation for a valid reason, for example: your partner or another close relative died shortly before the tax return or payment deadline. you had an unexpected stay in hospital that prevented you from dealing with your tax affairs.
Key legal elements
To get IRS penalties removed, request relief via phone or IRS Form 843, citing Reasonable Cause (like serious illness, natural disaster, death in family) or the First-Time Penalty Abatement (FTA) program if you have a clean compliance history for the prior three years. While penalties may be removed, interest is harder to abate and usually only decreases if the underlying penalty is reduced; paying the full tax bill stops future interest, and you can dispute penalties by calling the number on your notice.
IRS Penalty Abatement Request Letter
No Reasonable Cause or “No Probable Cause” shall mean that there exists a reasonable ground supported by the facts and circumstances strong enough themselves to warrant a reasonable person to believe that discriminatory practices have taken place against the Complainant in violation of the Ordinance.
You may be able to avoid the 10% and 25% tax penalties if your withdrawal falls under certain exceptions. The most common exceptions are: A first-time home purchase (up to $10,000) A birth or adoption expense (up to $5,000)
The "7 withdrawal rule" in retirement planning suggests taking out 7% of your savings in the first year, then adjusting for inflation annually, offering more income early but with higher risk than the traditional 4% rule, being potentially better for shorter retirements or risk-tolerant individuals who want more spending power upfront, though it's less sustainable long-term for a standard 30-year retirement. It's a guideline, not a guarantee, and its success depends heavily on market performance, individual health, and lifestyle, with some financial experts recommending more conservative rates or adjusting based on personal needs.
If a retirement account owner becomes disabled, the IRS will waive the 10 percent early withdrawal penalty so long as the account owner can show that they are unable to perform any substantial gainful activity and that the condition causing the disability is expected to result in death or last for a long time.
The Rule of 72(t) allows people to tap into their retirement accounts before age 59½ without owing a 10% early withdrawal penalty. Payments must last for at least 5 years or until you've reached age 59½, whichever is longer.
No. Many 401(k) plans allow you to take hardship distributions, however, the IRS doesn't have an early withdrawal from 401k hardship exception to its early withdrawal penalty.
We reviewed the exceptions to the 10% early withdrawal penalty for a traditional IRA, noting that the exceptions include first-time home-buying expenses (up to $10,000), higher education costs, medical expenses exceeding 10% of AGI for those under 59½, and withdrawals by individuals over 59½.
The IRS can waive penalties if you demonstrate that your failure to comply with tax requirements was due to reasonable cause. Acceptable reasons include serious illness, natural disasters, or other events beyond your control that prevented timely tax filing or payment.
For example, if a party to a case has failed to take legal action before a particular statute of limitations has expired, the court might decide that the said party preserves its rights nonetheless, since that party's serious illness is a good cause, or justification for having additional time to take the legal action.
Duration of police encounter: Reasonable suspicion allows only as much time as necessary to confirm or dispel the suspicion. Probable cause justifies custody until arraignment. Intrusiveness permitted: Reasonable suspicion: brief stop and frisk for weapons or protective sweep.