IRS Automates Two Key Penalty Relief Programs Affecting Millions of Taxpayers

WASHINGTON — The Internal Revenue Service has announced two significant changes to its penalty relief system, which will automatically waive certain penalties for millions of eligible individuals, businesses, and other organizations without requiring them to formally request it.

In a move addressing pandemic-era disruptions, the IRS announced on December 19 that it is providing approximately $1 billion in automatic penalty relief for the 2020 and 2021 tax years. Separately, the agency confirmed it will make its long-standing First-Time Abatement (FTA) relief automatic for eligible taxpayers beginning with the 2026 filing season. While these automatic relief measures are a significant step forward in reducing administrative burdens for businesses, the underlying compliance obligations remain unchanged.

The more immediate relief measure targets an estimated 4.7 million taxpayers—including individuals, businesses, trusts, estates, and tax-exempt organizations—who were assessed failure-to-pay penalties for the 2020 and 2021 tax years. The action stems from a procedural pause during the COVID-19 pandemic. Beginning in February 2022, the IRS temporarily stopped sending automated collection reminder notices for overdue tax bills. However, the failure-to-pay penalties continued to accrue during this period, creating a potential surprise for taxpayers who had not received the standard follow-up correspondence.

To be eligible for this specific pandemic-related relief, a taxpayer must have an assessed income tax liability of less than $100,000 for either tax year 2020 or 2021 and must have been issued an initial balance-due notice on or before December 7, 2023. The relief applies to penalties that accrued during a period ending March 31, 2024. The IRS has emphasized that this relief is automatic; eligible taxpayers do not need to take any action. For those who have already paid the penalties, the IRS will issue a refund or apply the amount as a credit to another outstanding tax liability.

The agency has already begun adjusting eligible individual accounts and plans to adjust business accounts through late December and early January 2024. Adjustments for trusts, estates, and tax-exempt organizations are scheduled for late February to early March 2024. The IRS noted that nearly 70% of the individuals benefiting from this relief have incomes under $100,000 per year. It is important for businesses to note that while penalties are being waived for this period, interest on the underpayments will not be waived. The standard failure-to-pay penalty will resume accruing on April 1, 2024, for all eligible taxpayers.

In a separate, more permanent procedural change, the IRS is also automating its First-Time Abatement (FTA) program. This change, set to take effect for the 2025 tax year filed during the 2026 season, will systemically waive penalties for taxpayers who have a clean compliance record. Previously, FTA was a form of relief that taxpayers or their representatives had to be aware of and proactively request, typically by phone or mail. The provision was outlined in the Internal Revenue Manual, which contains internal guidelines for IRS staff, making it obscure to many taxpayers.

In our experience, many small business owners were simply unaware that First-Time Abatement was an option, so making it automatic is a major improvement. However, automation removes a key strategic element. Previously, a business could choose when to request FTA, saving it for a year with a potentially larger penalty. Now, the system will apply it automatically, which might not always be the most financially advantageous timing. This change highlights that while the IRS is simplifying certain processes, it's no substitute for proactive tax preparation and compliance. Businesses must still diligently monitor their accounts to ensure relief is applied correctly and to maintain the clean three-year history required to qualify in the first place. For guidance on navigating these new procedures and ensuring ongoing compliance, business owners can contact C&S Finance Group LLC at csfinancegroup.com for assistance.

According to National Taxpayer Advocate Erin Collins, an estimated 1 million taxpayers qualify for FTA annually but have historically failed to request it, often because they were unaware it existed. The new automated process is designed to address this gap, primarily benefiting lower-income taxpayers who may not have professional representation. To be eligible for automatic FTA, a taxpayer must not have been assessed any penalties, excluding estimated tax penalties, for the three preceding tax years.

The automatic abatement will apply to failure-to-file, failure-to-pay, and failure-to-deposit penalties. Once a taxpayer uses the FTA, the three-year clean compliance clock resets. The IRS is expected to send letters to taxpayers who receive the automatic relief, explaining that the penalty has been waived and educating them on compliance requirements to avoid future penalties. Despite the automation, tax professionals advise businesses to continue monitoring their IRS accounts and transcripts to confirm that any eligible abatement has been correctly applied. If an automatic abatement is missed by the system, taxpayers will still have the ability to request it manually.

Ultimately, these programs reward a history of good compliance. The best way for businesses to benefit is to avoid needing penalty relief altogether by ensuring timely and accurate filings year after year.

Looking ahead, businesses should monitor their accounts for the automatic adjustments related to the 2020-2021 relief, which will continue into early 2024. As the 2026 filing season approaches, further guidance is expected on the implementation of the automatic First-Time Abatement system. The resumption of standard collection notices in 2024 also signals a return to pre-pandemic enforcement protocols that all businesses should be prepared for.