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The IRS recently announced that it is making it easier for taxpayers to obtain first-time penalty relief through a new process called the Automatic Exemption from Penalty, or AEP.
The new automatic process will replace the long-standing First Time Abate program and is designed to simplify how eligible taxpayers receive relief from certain IRS penalties. The Taxpayer Advocate Service estimates that more than 1.5 million taxpayers could potentially benefit from the automatic process based on prior-year data.
Here’s what taxpayers need to know.
How the New Automatic Penalty Relief Works
The IRS is beginning to phase in the Automatic Exemption from Penalty this summer. The program is being phased in for 2025 tax-year returns and 2026 quarterly returns, with 2026 tax-year returns expected to be included in 2027.
Taxpayers will still need to meet certain eligibility requirements similar to those under First Time Abate. Generally, taxpayers must have a good history of timely compliance for the three prior tax years.
For taxpayers who file quarterly returns, the IRS generally looks at the previous 12 consecutive quarters.
It’s also important to understand that not every IRS penalty will qualify for automatic relief.
What Penalties Qualify for AEP?
The new automatic relief can generally apply to certain common penalties, including:
- Failure-to-file penalties
- Failure-to-pay penalties
- Failure-to-deposit penalties
However, not every tax return or penalty will qualify. Certain information returns and returns associated with specific transactions are generally excluded. This includes Form 706, the federal estate tax return, and Form 709, the federal gift tax return.
What Do Taxpayers Have to Do?
For taxpayers who qualify, there is generally nothing they need to do to receive AEP.
That’s one of the biggest differences between the new automatic process and the traditional First Time Abate program. Instead of taxpayers having to contact the IRS and request relief, the IRS will automatically determine whether they qualify.
Eligible taxpayers should receive an IRS notice explaining that the applicable penalties were not assessed because they qualified for the exemption.
However, if a taxpayer believes they qualify for penalty relief but does not receive the automatic exemption, they should contact the IRS to determine whether other penalty-relief options are available.
What If You Don’t Qualify for Automatic Penalty Relief?
Even if you don’t qualify for AEP, you may still have options.
Taxpayers may be able to request penalty relief based on reasonable cause. This may apply when circumstances beyond the taxpayer’s control prevented them from filing, paying or meeting other tax obligations on time.
Examples may include:
- Death or serious illness
- Natural disasters
- Other circumstances beyond the taxpayer’s control
Depending on the circumstances, taxpayers may use Form 843, Claim for Refund and Request for Abatement, to request applicable penalty relief.
The IRS will review the taxpayer’s individual facts and circumstances to determine whether reasonable-cause relief applies.
Bottom line: The IRS’s new Automatic Exemption from Penalty could make it significantly easier for eligible taxpayers to receive penalty relief without having to ask for it. But taxpayers who don’t qualify automatically should remember that other forms of penalty relief may still be available.
For more tax news and information that can help you keep more money in your pocket, check out Tax News to Go.
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