You Qualified for Automatic Penalty Relief, But an IRS Error Kept You From Getting It

By Forrest Baumhover, CFP®, EA · Last verified August 28, 2026

Automatic Exemption from Penalty is supposed to apply itself — no request needed. The IRS's own rules provide for the case where it does not, because of a processing mistake on the IRS's side rather than anything the taxpayer did. There is a specific, named fix for exactly that situation, and it is not the same thing as asking for First-Time Abate.

This Is a Narrow Fix for a Specific Problem

Automatic Exemption from Penalty (AEP) is designed to apply itself when the IRS processes an eligible return — no call, no letter, no form. The same IRM Procedural Update that created AEP's governing rule, IRM 20.1.1.3.3.2.5, also added a second rule right alongside it — IRM 20.1.1.3.3.2.6 — for the case where that automatic process does not work as intended. Both were added by the same IRM Procedural Update, SBSE-20-0626-0643, dated June 17, 2026.

This page is not about a return that simply doesn't qualify for AEP. It is about a return that did qualify — it met every part of the compliance test — and still didn't get the relief, because something went wrong on the IRS's side while the return was being processed.

What Counts as an "IRS Error" Here

The source names three circumstances directly: a system or programming limitation that kept the return from receiving AEP at posting; the original return posting to the wrong taxpayer ID number or the wrong tax period; and a math error on the return that wasn't properly identified during processing. All three share one thing — the return itself was eligible, and something outside the taxpayer's control stopped the relief from attaching to it.

One example from the source makes the pattern concrete: a business attached a required schedule to its employment tax return showing the tax was already covered, the schedule was physically detached before the return finished processing, and a penalty was assessed because the schedule wasn't there to see. Once the schedule was located and confirmed valid, the source treats that as exactly the kind of error this provision exists to fix — through no fault of the taxpayer, the return's eligibility didn't get seen.

How This Differs From Asking for First-Time Abate

These are two different requests, and mixing them up costs time. First-Time Abate doesn't require proving the IRS made a mistake — it's available on request to anyone with a clean three-year compliance history, full stop, and it works by removing a penalty after it's been assessed. During AEP's rollout, the IRS's own announcement, IR-2026-83, tells taxpayers whose return simply processed before AEP caught up to it to ask for First-Time Abate instead — no error involved, just a timing gap in the rollout.

The manual-grant path this page covers is different: it only applies when the return's own eligibility for AEP was never in question and a verifiable IRS-side mistake is what blocked it. You're not asking the IRS for grace — you're asking it to correct something that should have happened automatically the first time. If you're not sure which situation you're in, that's not a problem: describing what happened is enough, and the IRS determines which relief actually fits.

One line to remember the difference: First-Time Abate asks the IRS for grace; this asks the IRS to fix its own mistake.

What to Ask For

Contact the IRS — by phone, using the number on whatever notice you received, or in writing — and describe what happened: that the return met AEP's compliance test, and name the specific processing problem (wrong ID number or tax period, a detached or overlooked attachment, an unidentified math error, or a system limitation). Ask that Automatic Exemption from Penalty be manually applied under IRM 20.1.1.3.3.2.6 for the reason described.

You don't have to catch this yourself. The source directs the IRS to grant this relief proactively whenever it identifies the error on its own, whether or not the taxpayer ever calls — but that's a directive to IRS employees, not a guarantee it happens before you notice a penalty on a bill. If you already got a bill for a penalty you believe AEP should have caught, that's the moment to raise it rather than wait.

If a request like this stalls and the delay is causing real financial hardship — not just inconvenience, but something like an active levy or an inability to pay other bills because of the disputed penalty — the Taxpayer Advocate Service is an independent office inside the IRS whose job is to help taxpayers stuck in exactly that position.

One technical limit worth knowing if your return was itself filed late: the source adds an extra check for late-filed returns specifically. The IRS will not manually grant this relief if the same account already shows this relief granted in any of the three tax years immediately before or the three tax years immediately after the return in question — a restriction that doesn't apply to a return filed on time.

What Happens Once It Is Granted

If a penalty was already charged, the IRS removes it and posts an unreversed TC 971 with Action Code 996 — the same marker CP95 and the other AEP notices refer to — showing the relief now applies to that return. If no penalty had been charged yet, the IRS posts that same marker to prevent one from being assessed at all. Either way, the outcome matches what would have happened if AEP had applied correctly the first time.

You may also receive one of the notices the IRS sends when AEP is granted — CP95 or CP95(SP) for an individual return, CP195B or CP895(b) for a business return — confirming the relief the same way it would if the error had never happened.

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