IRS will soon begin to automatically waive penalties for some filers. It will abate late-filing and late-payment penalties for taxpayers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. Penalties for late payroll-tax deposits and for delinquent returns of partnerships and S corporations are also eligible for the waiver. But the estimated-tax penalty can’t be waived. For years, taxpayers had to specifically request abatement under IRS’s first-time abate administrative policy by calling or writing the agency.
The new program is called Automatic Exemption From Penalty or AEP, and it is expected to begin sometime this summer. AEP applies to original returns, starting with 2025 returns. Similar to IRS’s current first-time abate policy, taxpayers qualify for relief for failure-to-file, failure-to-pay and failure-to-deposit penalties if they have a history of timely filing and paying taxes for the past three years. However, unlike the first-time abate policy, filers don’t need to take any action to get the relief. Instead, IRS will automatically apply the penalty exemption and send taxpayers a letter informing them that the agency didn’t assess a penalty. Note that IRS is phasing out its old first-time abate program, so taxpayers may still receive penalty notices for 2025 and 2026. If filers receive such a letter and believe they qualify for relief, they can call IRS and request penalty abatement.
IRS assessed $1.25 trillion in civil penalties in the 2025 fiscal year. 92% of the fines arose from late or unpaid employment taxes and deposits. The rest related to income taxes and excise taxes of businesses and individuals. But these figures don’t tell the whole story. Of that $1.25 trillion amount, IRS abated $1.21 trillion. Businesses with unpaid payroll taxes saw most of the relief. It wouldn’t shock us if IRS slapped a huge fine on one firm and later abated most of it.
IRS can impose severe penalties for frivolous arguments…up to $25,000. Paying taxes and filing returns are voluntary. The 16th Amendment is invalid. Wages are not taxable. These are some examples of frivolous arguments that taxpayers have made over the years as excuses for not paying federal income tax or for filing false returns. Of course, these claims don’t prevail with the courts. But the agency doesn’t always do so. And neither does the Tax Court. Take this case of a man who filed delinquent 1040s for multiple years but claimed at Tax Court that amounts taxpayers receive from renting real estate, sales proceeds and interest aren’t taxed. He also filed Schedule C claiming write-offs, many of which IRS disallowed. The Court applied the 20% accuracy-related penalty, but chose not to slap him with a fine for frivolous claims (Walcott, TC Bench Opinion).
