Eligible taxpayers to get automatic IRS penalty relief

The IRS announced it will soon automatically abate three types of penalties — failure to file, failure to pay, and failure to deposit — for taxpayers with a history of timely compliance.

The new process, called automatic exemption from penalty (AEP), replaces the long-standing first-time abatement (FTA) process, the IRS said in a Wednesday news release.

“By automatically applying penalty relief, the IRS recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted,” IRS CEO Frank Bisignano said in the release.

In November, National Taxpayer Advocate Erin Collins, who heads the Taxpayer Advocate Service (TAS), announced the IRS’s intention to automatically apply first-time abatement at the AICPA National Tax Conference.

Previously, information about FTA was only in the Internal Revenue Manual (IRM), which contains internal guidelines for IRS personnel to follow. They were neither statutory nor regulatory, so a taxpayer, CPA, or attorney calling the IRS on behalf of a client had to know they’re in the IRM.

“For years, too many eligible taxpayers missed out on first-time penalty relief simply because they did not know it was available, did not understand how to request it, could not get through to the IRS, or did not have a tax professional advising them,” Collins said Wednesday in a blog post.

Collins said the impact of the new program should be significant.

“In fiscal year 2025, nearly 220,000 taxpayers received FTA relief through the manual process,” she wrote. “TAS estimates that if AEP had been in place for the same period, over 1.5 million taxpayers would have received penalty relief.”

Program details

AEP, expected to begin this summer, will apply to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, as well as future tax periods, the IRS said. Taxpayers qualify if they have a history of timely filing the return and paying any tax due in the three prior years (or 12 consecutive quarters for quarterly returns).

When taxpayers qualify, penalties are not assessed during processing for failure to file, failure to pay, or failure to deposit. The IRS will apply AEP for eligible taxpayers and issue a notice confirming that the relief was granted.

Not all returns are eligible. For example, information returns and returns that are filed only in response to specific transactions or infrequent events generally are not eligible.

During the transition from the FTA process to the new one,some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns. Taxpayers who believe they qualify may contact the IRS to request First Time Abate.

AEP provides relief automatically and will replace FTA for eligible returns with original due dates on or after Jan. 1, 2027. Taxpayers may visit the administrative penalty relief page for more information.

Other penalty relief

Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause. The IRS will review those requests and notify taxpayers of the outcome. Taxpayers may visit the penalty relief for reasonable cause page for more information.

While AEP prevents the assessment of certain penalties, taxpayers must still pay any tax and interest due, as well as any penalties not eligible for relief.

AICPA advocacy

In March, the AICPA wrote to the IRS, saying it should expand the FTA program to cover more types of tax and information-return penalties and allow taxpayers to reverse an automatically applied FTA when they demonstrate reasonable cause.

The AICPA said it was seeking the reversal so that taxpayers “can save their one-time abatement for a future need,” a news release said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.