In summary, “penalty abatement” is asking the IRS to review your situation and see if you qualify for waivers on penalty fees they charged for late filing and/or late payment of your taxes.
Per the Internal Revenue Manual, the IRS permits a one-time waiver of certain penalties based on a taxpayer’s good compliance. The IRS calls this program “1st Time Penalty Abatement” and it allows a taxpayer to request an administrative waiver of one tax periods penalty fees based solely on a history of good compliance. This means you can request abatement of penalties charged to a single tax period provided the three prior tax years [all quarters] were timely filed and paid. This option does not require you to meet any standard of reasonable cause, but instead only looks for a good taxpaying history.
The primary method of receiving penalty abatement from the IRS is to establish reasonable cause as to why you were not timely with your tax returns. The IRS has criteria allowing taxpayers to petition for penalty abatement based on extenuating circumstances, or what the IRS deems “reasonable cause.” To qualify for reasonable cause penalty abatement you must successfully demonstrate there was no willful neglect and that your hardships had a direct relation to the inability to timely file/pay your taxes.
Reasonable cause criteria with the IRS can include events such as extreme medical hardship, fraud perpetrated upon you by a CPA/licensed tax preparer, natural disaster, etc.