@Dan226 the short answer is: it cannot be removed.
I am guessing the guest choose the option about "Host requests to cancel" and that is why the cancellation and penalty are on you.
This is the risk of having an active instant book feature.
Based on my 4 years experience, I never do "favorite" to new request/inquiry. It is a first come first serve as long as I am comfortable with the guest and reservation. Holding dates for people do not always end up with a confirmed reservation and it does not worth my time.
If you want to honor their reservation, you shouldn't ask them to cancel the reservation.
You can always contact airbnb and see if they can/willing to remove the penalty.