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) applies by itself when the IRS processes an eligible return — no call, no letter, no form. The same Internal Revenue Manual (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.

This page is not about a return that simply doesn't qualify for AEP. It is about a return that did qualify — it passed the three-year clean-history check — and still didn't get the relief, because something went wrong on the IRS's side while the return was being processed.

What to Ask For

One technical limit worth knowing if your return was itself filed late: ¶3 of IRM 20.1.1.3.3.2.6 adds an extra check for late-filed returns specifically. The IRS will not manually grant this relief if the same return type on that 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. The IRS checks both directions, which is why a late return filed years after the fact can be blocked by a later year's grant it had no way to know about. The restriction covers late-filed returns only, not on-time returns.

Call the number on your notice or write to the address on it. If you have no notice yet, see how to reach the IRS by phone. Say your return met AEP's three-year check and you still got a penalty. Name any processing problem you know of, such as a wrong ID number or tax period. Ask the IRS to apply AEP by hand under IRM Procedural Update SBSE-20-0626-0643, in the section that adds IRM 20.1.1.3.3.2.6 (paragraph (1)), for the reason described.

You don't have to catch this yourself. The update 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.

What Counts as an "IRS Error" Here

The source names three circumstances, and one of its examples is a detached Schedule B. The three are 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 Schedule B, a Form 941 attachment that lists tax liability by date, to its employment tax return, and the schedule showed unpaid tax. Someone detached the schedule before processing finished, so the IRS assessed a penalty it could not see the schedule for. Once the IRS found the schedule and confirmed it valid, the update treats that as the kind of error this provision fixes — through no fault of the taxpayer, the IRS missed the return's eligibility.

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 a taxpayer who has a clean three-year history, subject to the extra conditions for business and joint returns, 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 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. An unreversed TC 971 action code 996 shows AEP or a prior First-Time Abate grant (IRM Procedural Update sbse-20-0626-0643 ¶(12)); here it shows 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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