A New IRS Change Could Affect Millions of Americans - Here's What to Know

The IRS is implementing a change that might help you save on tax penalties and keep more of your money. Tax penalty relief has always existed, but taxpayers had to request it, so many eligible taxpayers missed out. Now, the IRS is automating that process to reward consistent taxpayers without them having to apply for relief.

Here's what to know about the changes coming to tax penalty relief and how they might impact you.

How tax penalty relief currently works

Under current tax law, the IRS might levy penalties against taxpayers who don't file a federal tax return or pay their federal tax burden. If a taxpayer demonstrates a reasonable cause contributed to the issue and has a clean history of compliance, the IRS may waive penalties entirely under the First-Time Abatement program. Some examples of reasonable cause include a serious illness, natural disaster, or another event beyond the taxpayer's control that prevented them from filing their taxes or paying their tax burden on time.

Unfortunately, many eligible taxpayers miss out on tax penalty relief. Some taxpayers don't know that the relief is available, while others don't know how to request it. Low-income taxpayers and those who can't afford representation are particularly impacted and are likely to miss out on available tax penalty relief.

How the Automatic Exemption from Penalty Program works

Under the new Automatic Exemption from Penalty Program, the IRS is automating the process of providing tax penalty relief to taxpayers with a history of tax compliance. If a taxpayer qualifies for tax penalty relief, then the IRS waives the tax penalty and simply doesn't apply it. There's no need for taxpayers to apply for relief, which should help expand the use of the penalty relief and ensure that more eligible taxpayers receive the relief.

The Automatic Exemption from Penalty Program applies to several penalties, including failure to file, failure to pay, and failure to deposit certain taxes penalties. Since late filing penalties may amount to up to 25% of the unpaid tax, and late payment and deposit penalties build up with time, the penalty relief might help taxpayers save significant amounts of money. Additionally, since the penalties are never issued under the program, unpaid penalties don't accrue interest.

The IRS sends a letter to taxpayers letting them know that the tax relief has been applied, but there's no need for taxpayers to respond or follow up.

Who qualifies for the Automatic Exemption from Penalty Program

The program is available for individuals and businesses. To qualify for relief, taxpayers must generally have timely filed their tax returns for the previous three years. Additionally, taxpayers must have either had no IRS penalties assessed against them, or any assessed penalties must have been waived for reasonable cause or IRS mistake.

Businesses that face a failure to deposit penalty must meet an additional requirement; the IRS must not have waived a failure to deposit penalty four or more times during the previous three years.

If a taxpayer doesn't qualify for the Automatic Exemption from Penalty Program, they may still apply for a tax penalty waiver for reasonable cause, but need to file an application for the IRS to review.

When the program goes into effect

The IRS expects to transition to the Automatic Exemption from Penalty Program beginning in 2026, but the transition isn't immediate. The program applies to 2025 tax returns and 2026 quarterly filings. It should replace the old system entirely for returns due after January 1, 2027, meaning taxpayers may fully enjoy this automated process beginning next year.

As the change gradually takes effect during 2026, some taxpayers may still receive notices about their tax penalties. These taxpayers may still request tax penalty relief, but must do so manually by filing Form 843 and including necessary documentation.

How the Automatic Exemption from Penalty Program simplifies taxes

The Automatic Exemption from Penalty Program offers valuable benefits not only to taxpayers, but to the IRS. Taxpayers receive penalty relief without having to apply for it. As a result, the program should result in fewer phone calls, written requests, and manual penalty abatement cases for the IRS. The program may result in a reduced workload, leaving IRS staff free to attend to other matters that require their attention.

The program may have a significant impact, given the volume of tax abatement applications the IRS has previously received. In fiscal year 2025, nearly 220,000 taxpayers received relief after going through the manual process. If the Automatic Exemption from Penalty Program had been in effect during that same period, not only might the IRS have saved time reviewing those applications, but the Taxpayer Advocate Service estimates that over 1.5 million taxpayers could have received penalty relief without having to ask for it.

Bottom line

The new program may help millions of Americans avoid tax penalties, but taxpayers must still pay any tax and interest owed. The program's implementation is paired with the promise of tougher tax enforcement and fraud protection as the IRS revisits its approach to tax compliance.

Staying on top of your taxes and ensuring you file your returns on time is still important, even though penalty relief may be available. If you need help, consider meeting with a tax professional to ensure you meet all tax deadlines, avoid penalties, and eliminate some money stress.

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