Understatement Penalty Relief After Forgetting to Report PayPal Income - Help Needed

Thank you so much for this info! I've never heard of "reasonable cause" before. Do I just write this letter and send it to the address on the notice I received? And should I pay the tax amount and interest while disputing the penalty, or wait until they decide on the abatement?

Yes, you should respond to the address listed on the notice you received. I recommend paying the tax and interest now if you can afford it, as interest will continue to accrue even while you're requesting abatement. Only the penalty portion might be forgiven through abatement. For your letter, be specific about why you didn't report the income (genuine confusion about PayPal reporting requirements), mention that this was your first year with significant music income, and explain what steps you've taken to prevent this from happening again (like consulting with a tax professional or educating yourself on self-employment tax requirements).

That sounds helpful but did it actually work for you? I'm skeptical about these AI tools actually understanding the nuances of tax law. Did the IRS actually accept the letter it helped you create?

Does it help with figuring out how much you actually owe too? I'm in a similar situation with unreported income but I'm not even sure the IRS calculation is correct in my case.

Yes, it absolutely worked! The IRS accepted my reasonable cause argument and removed the $1,200 penalty. I still had to pay the taxes and interest, but getting the penalty waived was huge. It does help with checking calculations too. You can upload the IRS notice and your original tax documents, and it walks through the math to verify if their assessment is correct. In my case, it confirmed the tax amount was right but found that they had calculated the interest incorrectly, which saved me another $120.

Wait how does that even work? I thought it was impossible to get IRS callbacks. Is this some kind of priority service that costs a fortune?

Sounds like a scam tbh. Nobody gets callbacks from the IRS that quickly. I've been trying for MONTHS. Are you sure you weren't talking to someone pretending to be from the IRS?

It uses a system that constantly redials and navigates the IRS phone tree for you, then when it finally reaches a human, it calls you and connects you directly. It's completely legit - the call comes directly from the actual IRS number. No, it's not a premium government service or anything shady. You're still talking to the same IRS agents everyone else is - the difference is you don't have to waste hours on hold yourself. The agent I spoke with was definitely legitimate - they had all my tax info and were able to make notes directly in my file.

This is really helpful! I definitely haven't had any penalties before. Is First Time Penalty Abatement something I should specifically mention in my letter? Or should I try to call and request this directly?

You should definitely mention First Time Penalty Abatement specifically in your letter or phone call. Use those exact words. Many IRS agents are trained to check for FTA eligibility, but some might not think to offer it unless you ask directly. It's usually faster to call and request it, as they can often approve it immediately over the phone if you qualify. Just have your notice information ready when you call. In your case, since you've never had penalties before, there's a very good chance you'll qualify!

This is such good advice! I made the mistake of waiting to pay anything while I disputed the penalty, and the interest just kept growing. Ended up owing way more in the end.