A new program offered by the Internal Revenue Service (IRS) could help taxpayers obtain relief for penalties after a first-time compliance failure.
Being phased in with 2025 tax returns and 2026 quarterly business returns, the Automatic Exemption from Penalty (AEP) program is expected to speed up the ability of generally compliant taxpayers to receive penalty relief from common filing lapses, like failure to pay or failure to file.
AEP is replacing the earlier First Time Abate (FTA) program offered by the IRS. Under that program, compliant taxpayers also received relief from first-time penalties, but the administrative structure of the program made it difficult to use and required correspondence with the IRS. A standout difference between the FTA and the AEP is that, as the name says, the penalty relief will be automatically provided to eligible taxpayers without the need for them to apply for it. The FTA required taxpayers to follow up with the IRS to complete additional administrative steps and request relief.
What does the AEP do?
The AEP will automatically apply to eligible taxpayers who file an original tax return late, or pay the tax on that return late. If your compliance history meets IRS requirements, the agency will:
-
Send you a notice that an AEP was applied and how it was applied.
-
You will still be liable for payment of the tax and interest applied to the late payment.
-
You will not be assessed a penalty for failure to file, failure to pay, or failure to deposit (for compliant business owners).
Who is eligible for the AEP?
What does the IRS consider to be a “timely compliance history”? Reading the eligibility fine print for the AEP is important. Some of the eligibility requirements include:
-
Timely filing of the same type of return for three years prior to the problem return or failure.
-
During that time, the taxpayer generally must have timely filed the same type of return and timely paid the tax due. AEP relief applies only to eligible returns.
-
Business owners may receive automatic relief from failure to deposit penalties if they meet the IRS compliance requirements for the prior 12 consecutive quarters.
-
If there was a failure to deposit penalty, that penalty could not have been for failure to use the Federal Tax Payment System (EFTPS).
If you have longstanding payroll tax problems, such as failing to report or pay over employment taxes, the issue may extend well beyond eligibility for penalty relief.
Understanding the difference between an inadvertent filing error and conduct that may be viewed as tax fraud is important when evaluating potential exposure to IRS enforcement action. For additional background, see our guide, Understanding Tax Fraud.
Payroll tax issues involving employee withholding taxes can carry significant consequences and may require careful evaluation, particularly when the conduct extends beyond a one-time compliance lapse.
When penalty relief may not be enough
If you are behind on payroll tax withholding or have received a concerning IRS notice, speak with our tax group. At Robert J. Fedor, Esq., L.L.C., we provide experienced legal counsel to help clients navigate IRS inquiries, compliance concerns, and potential enforcement actions.
Contact our tax lawyers at 440-250-9709. We serve clients internationally and throughout Northeast Ohio, Chicago, and New York City from our offices in Cleveland and Chicago.
