Stopping it Before it Starts
If your return is late, you can file a notice or attach a letter to your return asking them not to assess the penalties due to reasonable cause. You can also do this by filing in person at a local IRS office.
Request for Abatement
After an Assessment, you can send in Form 843 and a letter setting forth reasonable cause for the penalty to be abated. In putting forth your arguments for reasonable cause it is important to mention what caused you to file late, and to show that it was something severe enough to prevent you from getting your normal business done. You also need to show that once the temporary events preventing you from getting your taxes filed or getting them done properly had passed, you quickly took action to take care of the issue.
Negotiate with Collection Division of IRS
If you are unsuccessful in stopping the assessment and a request for abatement is denied, you can still ask the a Revenue Officer or collection official at the call-center to abate the penalty as part of the process of entering into an Installment Agreement. They may be willing to at least take the penalties off of a few periods to get the deal done.
Pay the Penalties and Request a Refund
You have a second bite at the apple with IRS once you are paid up. You have 2 years to file a claim for refund and you can make the same arguments set out in Section 2 above.