Getting a love‑letter from the IRS that tacks on hundreds or thousands of dollars in penalties is never fun. Before you send a check, remember: many late‑filing, late‑payment, and payroll‑deposit penalties can be wiped away—or refunded—even after you’ve paid. Here’s how to work the rules to your advantage.

The Three Big Penalties Hawaiʻi Owners See Most

• Late‑filing penalty – up to 5 % of the unpaid tax per month, max 25 %. (For partnerships and S‑corps, the IRS charges a flat fee per partner/shareholder.)

• Late‑payment penalty – 0.5 % of the unpaid balance per month, max 25 %.

• Failure‑to‑deposit (payroll) penalty – 2 % to 10 % of the required deposit, depending on how late you were.

Those numbers pile up quickly—especially with Hawaiʻi cash‑flow timing challenges—but they’re not carved in lava rock.

1. First‑Time Abate: The Easy Button

If you’ve kept a clean filing record for the past three tax years, you can ask for a “first‑time abate” and the IRS will usually erase the penalty with a single phone call or secure‑message request. It covers failure‑to‑file, failure‑to‑pay, and failure‑to‑deposit penalties. 

Pro tip: Have the IRS notice CP or Letter number handy when you call, and literally ask for a “first‑time abatement.” Magic words matter.

2. Partnership Relief Under Revenue Procedure 84‑35

Own a partnership with 10 or fewer partners (that includes most Hawaiʻi LLCs taxed as partnerships)? If every partner reported their share of income on time, the IRS presumes “reasonable cause” for a late partnership return. Cite Revenue Procedure 84‑35, and the section‑6698 penalty often disappears.

3. Reasonable‑Cause Arguments

No first‑time abate? Not a tiny partnership? You can still win relief if you prove you “exercised ordinary business care and prudence but were unable to comply.” The IRS lists examples such as serious illness, natural disasters, or unavoidable destruction of records. 

• A brief timeline of events (dates, what happened, how you responded).

• Supporting docs—doctor’s notes, insurance claims, repair invoices, or news coverage of the disaster.

• Proof you corrected the issue (return filed, tax paid, deposits made) as soon as reasonably possible.

How to Ask—and How to Get a Refund if You Already Paid

1. Call first. Use the phone number on your IRS notice and politely request penalty abatement, citing the technique above. Many reps can lift the charge on the spot.

2. Escalate in writing. If the call doesn’t work—or if you’ve already paid—file IRS Form 843 within three years of the return date or two years of the payment date to claim a refund or formal abatement. 

3. Stay compliant going forward. Once you receive relief, keep your record clean; repeat penalties are much harder to erase.

Key Takeaways for Island Entrepreneurs

• Don’t write a check until you explore first‑time abate, Rev. Proc. 84‑35, or a reasonable‑cause claim.

• A concise story plus proof usually beats a long emotional letter.

• Even if you’ve paid, Form 843 can claw the money back—time limits apply.