2026 IRS Penalty & Abatement Strategies for High-Income Virginia Filers
A missed deadline used to be annoying. Now it's expensive.
The One Big Beautiful Bill Act (OBBBA) made most TCJA provisions permanent, which is good news for tax rates. But it also tightened enforcement, raised penalty minimums, and introduced new traps that didn't exist last year. If you're a high-income filer—especially if you own an S-Corp, partnership, or rental properties—2026 demands a different level of attention.
Here in RVA, the changes stack. Federal penalties, Virginia's strict 90% payment rule, and Richmond's upgraded BPOL enforcement all hit at once. The good news? Relief exists. But you have to know how to qualify for it before you need it.
Let's break it down.
How Federal Penalties Actually Work in 2026
The IRS uses three main penalty categories for late or incorrect filings. These aren't discretionary. They're automatic unless you qualify for specific relief.
1. Failure to File (FTF) — IRC §6651(a)(1)
You owe 5% of unpaid tax per month the return is late, capped at 25%.
New for 2026: If you're more than 60 days late, the minimum penalty is $525 (or 100% of unpaid tax, whichever is less). That's up from prior years.
2. Failure to Pay (FTP) — IRC §6651(a)(2)
You owe 0.5% of unpaid tax per month, also capped at 25%.
Here's the thing: when both FTF and FTP apply at the same time, the IRS reduces the FTF penalty by the FTP amount. So you're paying 5% combined per month—not 5.5%. Small comfort, but it matters when the numbers get big.
3. Pass-Through Entity Penalties — IRC §§6698 and 6699
S-Corps and partnerships don't pay tax at the entity level, so their penalties work differently. Miss the March 15 deadline for Form 1120-S or Form 1065, and you owe approximately $250 per owner per month (adjusted annually for inflation), up to 12 months.
That adds up fast.
2026 Federal Penalty Rate Summary
| Penalty Type | IRC Section | 2026 Rate | Maximum |
|---|---|---|---|
| Failure to File (Individual) | §6651(a)(1) | 5% per month | 25% of tax |
| Failure to Pay (Individual) | §6651(a)(2) | 0.5% per month | 25% of tax |
| Minimum FTF (>60 days late) | §6651(a) | $525 or 100% of tax | N/A |
| Partnership Failure to File | §6698 | ~$250 per partner/mo* | 12 months |
| S-Corp Failure to File | §6699 | ~$250 per shareholder/mo* | 12 months |
| Failure to Furnish K-1 | §6722 | $60–$340 per statement** | $1.4M–$4.1M |
| Accuracy-Related (Negligence) | §6662 | 20% of underpayment | N/A |
| Fraud Penalty | §6663 | 75% of underpayment | N/A |
*Adjusted annually for inflation; verify exact 2026 amount with IRS guidance.
**$60 if corrected within 30 days; $130 if corrected by Aug. 1; $340 if later/not furnished; $680 for intentional disregard.
The New 2/37 Rule (And Why It Matters for Accuracy Penalties)
The OBBBA introduced a new limitation on itemized deductions called the 2/37 rule. If you're in the 37% bracket (estimated thresholds for 2026: single filers over ~$626,000 or joint filers over ~$751,000, subject to IRS inflation adjustment), the effective value of your itemized deductions is capped at 35%.
Why does this matter for penalties? Because errors in this calculation can trigger the substantial understatement penalty under IRC §6662(b)(2)—a flat 20% on the underpayment.
For most filers, an understatement is "substantial" if it exceeds 10% of the correct tax or $5,000. But if you claim the Section 199A QBI deduction, that threshold drops to 5%. Minor math errors become penalty triggers.
First-Time Abate: Now Automatic in 2026
This is the single most important change for penalty relief.
Starting in 2026, the IRS automatically applies First-Time Abate (FTA) for qualifying taxpayers. You don't have to call. You don't have to file Form 843. If you meet the criteria, the system handles it.
FTA Eligibility (All Three Required)
- Filing compliance: All required returns filed (or valid extensions on file).
- Payment compliance: Tax paid in full, or you're current on an installment agreement.
- Clean 3-year history: No significant penalties (excluding estimated tax) in the prior three years.
What FTA Covers
- Failure to file
- Failure to pay
- Failure to deposit
What FTA Does NOT Cover
- Accuracy-related penalties (IRC §6662)
- Fraud penalties (IRC §6663)
- Information return penalties (W-2s, 1099s)
There's no dollar limit on FTA. If you owe $50,000 in FTF penalties and you qualify, it's gone. That's a significant safety net—but only if you've maintained a clean record.
When FTA Doesn't Apply: Reasonable Cause
If you don't have a clean 3-year history, your fallback is reasonable cause. This requires showing you exercised "ordinary business care and prudence" but still couldn't comply due to circumstances beyond your control.
Let's be real: "I forgot" doesn't work. Neither does "my accountant dropped the ball" (unless the error involved a complex legal judgment, not a clerical task).
What Actually Qualifies
| Scenario | Required Documentation | Narrative Focus |
|---|---|---|
| Medical Emergency | Hospital discharge papers, doctor's letter | Timeline of illness vs. deadline |
| Natural Disaster | Insurance claims, FEMA letters, photos | Direct impact on record access |
| Records Loss | Fire/police reports, custodian affidavit | Efforts to reconstruct data |
| Erroneous Advice | Written correspondence from IRS/advisor | Reliance on professional judgment |
Step-by-Step: How to Protect Yourself in 2026
Check your 3-year penalty history now. If you have a clean record, guard it. You may qualify for automatic FTA if something goes wrong.
Pay first, file later. Even if your return isn't ready, paying by the deadline reduces FTP exposure and preserves FTA eligibility.
Track entity deadlines separately. S-Corp and partnership penalties stack per owner. A late Form 1120-S with four shareholders = 4× the penalty.
Document hardships immediately. If something happens (medical issue, disaster, records loss), gather evidence while it's fresh. The IRS won't take your word for it later.
Treat Virginia as a separate system. Federal relief doesn't carry over to state penalties. You need to meet Virginia's rules independently.
Real-World Example: Marcus and Denise in Richmond
Marcus and Denise are married, filing jointly. Combined AGI: $620,000. They own:
- An S-Corp consulting business (2 shareholders: Marcus and Denise)
- A long-term rental property in Church Hill
What Went Wrong
Their S-Corp return (Form 1120-S) was due March 15, 2026. Their accountant filed it June 20—over 3 months late. Their personal return was filed on time, but they underpaid by $48,000 and didn't settle until August.
The Math
S-Corp Penalty (IRC §6699):
- ~$250 × 2 shareholders × 4 months = $2,000
Failure to Pay Penalty (IRC §6651(a)(2)):
- 0.5% × $48,000 × 5 months = $1,200
Interest (IRC §6601):
- Federal short-term rate + 3%, compounded daily. Assume ~$900 over the period.
Total federal exposure: ~$4,100 before any accuracy review.
The Save
Marcus and Denise had a clean 3-year history. The IRS automatically applied FTA to the failure-to-pay penalty, eliminating $1,200. They requested abatement on the S-Corp penalty by citing their accountant's documented health issue (a legitimate reasonable cause). Penalty reduced to $0.
Final cost: ~$900 in interest. Still annoying, but a fraction of what it could have been.
Virginia's 2026 Penalty Framework
Virginia's rules are separate from federal—and in some ways, stricter.
The 90% Rule
Virginia grants an automatic 6-month filing extension (May 1 → November 1). But there's no payment extension. You must pay at least 90% of your final liability by May 1 to avoid the extension penalty.
If your balance due exceeds 10% of total tax:
- Extension penalty: 2% per month (up to 12%)
- Late payment penalty: 6% per month (up to 30%)
Virginia interest for 2026 = federal underpayment rate + 2% = ~9%.
Pass-Through Entity Tax (PTET)
The PTET election remains a powerful SALT workaround for Virginia S-Corps and partnerships. By paying tax at the entity level, you deduct state taxes as a business expense—bypassing the $40,000 federal SALT cap.
But the election must be made by the return due date. A late entity return can blow the deduction entirely.
Virginia Penalty Waivers
For penalties over $2,000: File an Offer in Compromise under Va. Code §58.1-105.
For penalties under $2,000: Contact the Office of Customer Services in Richmond. Acceptable grounds mirror federal reasonable cause—fire, death, hospitalization. "I forgot" won't fly.
Richmond BPOL: What Changed for 2026
Richmond doubled the BPOL threshold from $250,000 to $500,000. If your gross receipts fall between $5,000 and $500,000, you now pay a flat $30 license fee instead of a percentage.
Above $500,000, you're still subject to the gross receipts tax. Filing deadline: March 1. Penalties for late filing: 10% (minimum $10) + 10% annual interest starting April 1.
The new RVA Business Portal (rvapay.rva.gov) consolidates BPOL, Business Personal Property, and Meals Tax in one place. The "exception dashboard" flags unfiled periods and outstanding balances automatically—so delinquency is now more visible to the city.
Common Mistakes That Kill Abatement Requests
No documentation. The IRS and Virginia Tax don't accept "trust me." Medical records, police reports, or written correspondence are required.
Current non-compliance. If you're delinquent on a new filing, you won't get relief for old penalties. Clean up current issues first.
Wasting FTA on the wrong penalties. FTA only covers failure-to-file, failure-to-pay, and failure-to-deposit. Accuracy and fraud penalties are excluded.
Vague explanations. "I was overwhelmed" doesn't meet the reasonable cause standard. You need a specific timeline showing how an external event caused the failure.
Missing the deadline. Abatement requests must fall within the refund statute of limitations—generally 3 years from filing or 2 years from payment, whichever is later.
FAQ
Can I get FTA if I'm on an installment agreement?
Yes—as long as the agreement is current and in good standing.
Does FTA apply to accuracy-related penalties?
No. FTA is limited to failure-to-file, failure-to-pay, and failure-to-deposit penalties.
If the IRS abates my penalty, does Virginia follow?
No. Virginia is a separate system. You must request state relief under Virginia rules.
What if my tax preparer made the mistake?
You can still qualify for reasonable cause, but only if the error involved a complex legal judgment—not a clerical task like mailing the return.
How long do I have to request abatement?
Generally within the refund statute of limitations: 3 years from filing or 2 years from payment, whichever is later.
Does Richmond follow the same penalty abatement rules as Virginia?
Similar, but Richmond has its own code (23VAC10-500-570). You must show you were not at fault and acted as a "reasonably prudent person."
What to Do Now
If you're a high-income filer or business owner in Virginia, here's your move:
- Check your 3-year penalty history
- Align estimated payments with PTET credits
- Calendar entity deadlines separately from personal deadlines
- Build a documentation habit for hardships
The 2026 rules are tighter. But if you stay ahead of them, the relief options are real—and automatic.
Need Help?
At The RVA Accountant, PLLC, we help high-income filers and business owners reduce penalties, fix compliance gaps, and build systems that prevent problems before they start.
Book a consultation:
👉 www.thervaaccountant.com/contact-us
Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or accounting advice. Consult with your tax advisor before implementing any strategy discussed here.