Penalty abatement is one of the highest-return services an independent tax practitioner can add to their engagement menu. When a client receives a CP14 or CP2000 stacking hundreds or thousands of dollars in failure-to-file or failure-to-pay charges on top of a tax balance, a practitioner who knows the abatement process can often eliminate those penalties within a single phone call or a short written request. The IRS announced on July 8, 2026 (IR-2026-83) the Automatic Exemption from Penalty (AEP) program, a significant procedural shift that replaces First Time Abatement for returns due on or after January 1, 2027. That shift does not reduce the practitioner's role -- it changes where that role is most needed.
This practitioner guide covers the complete abatement workflow for EROs, EAs, CPAs, and AFSP participants: the IRS penalty landscape and which penalties are abatable; the 2026 AEP transition; AEP eligibility screening; manual FTA requests via PPS for prior-year returns; Form 843 for paid-penalty refunds; reasonable cause documentation; OBBBA-triggered MeF programming errors as a new reasonable cause scenario; accuracy-related penalty defenses; the IRC Section 6751(b) supervisory approval challenge; and the Appeals pathway when abatement is denied.
All statutory references, program details, and dollar figures in this guide should be verified at IRS.gov before relying on them in client engagements. IRS administrative programs change. This guide is informational and does not constitute legal or tax advice.
The IRS Penalty Landscape: What Gets Assessed, What Gets Abated
The IRS assesses penalties automatically when returns are filed late, taxes are paid late, required employment tax deposits are missed, or information returns are filed incorrectly. The system imposes these penalties by computer based on what the return or account shows; it does not know or consider the taxpayer's compliance history, personal circumstances, or whether an external event caused the failure. Abatement is the mechanism for putting those facts in front of a human decision-maker who can remove a charge the computer had no reason not to impose.
The five major abatable penalty categories are: (1) failure to file under IRC Section 6651(a)(1), which accrues at 5 percent of unpaid tax per month up to 25 percent; (2) failure to pay under IRC Section 6651(a)(2), which accrues at 0.5 percent per month up to 25 percent, increasing to 1 percent per month after a final levy notice; (3) failure to deposit employment taxes under IRC Section 6656, with rates from 2 percent for deposits one to five days late up to 15 percent; (4) information return penalties under IRC Sections 6721 and 6722 for late, incorrect, or unfiled W-2s, 1099s, and similar documents; and (5) certain international information return penalties, though those follow different abatement pathways. Verify current penalty rates at IRS.gov; penalty amounts are subject to annual adjustment.
Several penalty categories are explicitly outside the standard abatement programs and must not be confused with the above: accuracy-related penalties under IRC Section 6662 (substantial understatement, negligence, valuation misstatement), civil fraud penalties under IRC Section 6663, estimated tax underpayment penalties under IRC Section 6654, and FBAR penalties under Title 31. Requesting abatement of an ineligible penalty type wastes the client's time and can complicate the account. The first task in any abatement engagement is confirming the exact penalty code section from the IRS notice before drafting the request.
The primary abatement routes for eligible penalties are: first-time abatement (FTA) and its successor Automatic Exemption from Penalty (AEP); reasonable cause; statutory exceptions; and penalty reduction for installment agreement participation. Each route has different eligibility criteria, documentation requirements, and procedural mechanics. This guide addresses each in sequence, starting with the 2026 AEP transition.
The 2026 Shift: AEP vs. Legacy FTA
The IRS announced the Automatic Exemption from Penalty program on July 8, 2026 (IR-2026-83). AEP applies to eligible returns with original due dates on or after January 1, 2027; it does not cover 2025 returns or any prior-year returns. Under the legacy FTA system, a practitioner had to initiate a request -- by phone through the Practitioner Priority Service, by written letter, or via Form 843 -- for every qualifying penalty on a client's account. The IRS then verified eligibility and removed the penalty. Under AEP, the IRS intends to run the eligibility check internally and apply the exemption automatically for qualifying accounts without a formal practitioner request. Verify current AEP scope and eligibility at IRS.gov; the program was announced July 8, 2026 (IR-2026-83) and during the transition period through December 31, 2026, FTA remains available alongside AEP for qualifying returns.
What stays the same: the three-year clean compliance criteria that defined FTA eligibility carry forward under AEP. A taxpayer who has not filed all required returns for the prior three years, has a prior penalty in that window, or has an outstanding unpaid balance without an installment agreement will not qualify under AEP any more than they would have qualified under FTA. The eligibility standard is structurally continuous; the delivery mechanism changes.
What changed: AEP does NOT cover prior-year returns. Tax year 2024 and earlier remain under the legacy FTA system, which means practitioners must continue to file manual requests for all prior-year penalties. AEP also does NOT cover accuracy-related penalties, fraud penalties, or estimated tax underpayment, consistent with the exclusions under legacy FTA. The critical practitioner implication is this: do not assume AEP handled a client's penalty situation. Pull the transcript, confirm what was assessed, confirm what was removed, and verify that any remaining balance reflects the correct post-abatement position. The automatic process is only as accurate as the data in the IRS's systems, and account transcript errors are not rare.
AEP DOES NOT REPLACE PRIOR-YEAR FTA REQUESTS
Tax year 2025 and earlier: manual PPS call, written request, or Form 843 required. FTA is the applicable abatement route. AEP applies only to returns with original due dates on or after January 1, 2027, beginning with 2026 tax year returns. Verify current AEP scope at IRS.gov/newsroom/ir-2026-83.
AEP Eligibility Screening: The Three-Year Clean Compliance Test
Whether the abatement is AEP (automatic, for returns due on or after January 1, 2027) or manual FTA (required for 2025 returns and all prior years through the December 31, 2026 transition cutover), the eligibility screen follows the same three-part test the IRS applies before granting relief. Practitioners who verify eligibility before any client communication avoid the most common failure in this work: promising relief on a penalty the IRS will not remove.
Three-year clean filing history
The taxpayer must have filed all required returns (or obtained a valid extension) for the three tax years immediately preceding the year at issue. A single unfiled required return in the look-back window disqualifies the request. If the client has missing prior-year returns, those must be filed and reflected in IRS records before any abatement request is made. Confirm filed status on the client's IRS account transcript before the call or letter, not after.
No prior-period penalty assessments
No failure-to-file, failure-to-pay, or failure-to-deposit penalty may have been assessed for the same three prior tax years. A penalty that was assessed and then itself abated still counts as having been assessed for this purpose. The IRS does not reset the look-back clock on abated penalties. If a prior abatement exists for any of the three look-back years, the client is not eligible for a second FTA or AEP exemption until they have rebuilt a clean three-year history. Verify the IRS's current interpretation of the penalty history requirement at IRS.gov.
Underlying tax paid or on an installment agreement
The tax balance for the period at issue must be paid in full or covered by a current, compliant installment agreement at the time of the abatement request. For failure-to-pay penalty abatement, this requirement is especially important: the IRS does not typically remove an FTP penalty on a balance that remains open without any payment arrangement. See the installment agreement practitioner guide for how to establish an IA in advance of an abatement request.
How to verify eligibility on the account transcript
Pull the client's IRS account transcript and tax return transcript through IRS e-Services using your authorized CAF number. On the account transcript, look for: (a) return posted codes (TC 150) for the three prior years confirming filed returns; (b) absence of penalty transaction codes (TC 160 for failure-to-file, TC 270 for failure-to-pay, TC 180 for failure-to-deposit) for the three look-back years; and (c) a zero balance or an active installment agreement code (TC 971 with AC 063 or similar) for the year at issue. Do not rely on memory of what was filed in prior seasons. Pull the transcript fresh for every abatement engagement.
When AEP Applies Automatically vs. When a Manual Request Is Still Required
The practitioner's decision tree for any penalty notice should follow this sequence: First, identify the tax year to which the penalty relates. For 2025 returns (due April 15 or October 15, 2026) and all prior years, AEP does not apply; use the legacy FTA path via PPS, written request, or Form 843. For 2026 tax year returns (due April 2027 and beyond), verify whether AEP has applied automatically by pulling the transcript and confirming the penalty was suppressed. If AEP applies and the client meets the three-year eligibility criteria, the transcript should reflect automatic suppression. If the penalty was not automatically suppressed on an AEP-eligible return, a manual FTA request is warranted as a fallback.
For 2025 returns and all prior years, AEP does not apply. Every abatement request for those years requires practitioner action: a PPS phone call for FTA on assessed-but-unpaid penalties, a written request letter, or Form 843 for paid penalties. The volume of manual FTA work does not decrease until 2027, when AEP begins covering 2026 returns. Practitioners working the 2026 filing season should plan for a full manual FTA workflow on any 2025 or prior-year penalty notice.
Employment tax clients (payroll accounts with failure-to-deposit penalties) present a separate situation. The scope of AEP as currently described by the IRS does not extend to all employment tax penalty types. Practitioners handling payroll accounts should not assume AEP resolved deposit penalties; confirm on the employment tax transcript. The same three-year clean compliance standard applies to FTD penalties, but the request channel and the transcript verification process differ from individual income tax accounts.
Manual FTA Request via Practitioner Priority Service: The PPS Call Workflow
For tax year 2024 and earlier (and for any 2025 penalty that AEP did not automatically resolve), the fastest abatement route is a phone call to the Practitioner Priority Service. PPS is the dedicated IRS line for tax professionals, and a PPS call with a valid Form 2848 on file is typically faster than a written request. IRS representatives can access the account transcript in real time, verify eligibility, and input the abatement during the call. A confirmed abatement generally reflects on the account transcript within a few business days.
What to have ready before dialing
- A valid Form 2848 Power of Attorney on file with the IRS CAF unit, covering the specific tax periods and penalty types at issue. Without it, the representative cannot discuss the account. Verify that your Form 2848 is processed and active in the CAF system before calling.
- The client's SSN or EIN, the specific tax periods at issue, and the penalty notice number.
- The client's IRS account transcript, pulled in advance to confirm the three eligibility criteria. Do not guess at the transcript; a request based on incorrect assumptions will be denied and may require a follow-up call or written appeal.
- If the underlying tax balance is not yet paid, confirmation that an installment agreement is in place or is being established simultaneously (the IRS may not grant FTP penalty abatement on an open unpaid balance).
What to say and how to document the result
Once authenticated, state: "I am calling to request first-time abatement of the [failure-to-file / failure-to-pay / failure-to-deposit] penalty assessed for tax year [year] under IRC Section [6651(a)(1) / 6651(a)(2) / 6656]. My client has a clean three-year filing and payment history for the three years prior to the year at issue and meets the FTA eligibility criteria." The representative will verify the three criteria from their end. If approved, the representative will input the abatement and provide a confirmation number. Record: the confirmation number, the representative's employee ID number, the date and time of the call, and the penalty amount approved for removal. All of this belongs in the client file immediately, before memory fades.
If the representative declines, ask for the specific reason and write it down verbatim. Common denial reasons include an unfiled prior-year return showing in IRS records (client filed but return not posted), a prior penalty that the practitioner was not aware of, or an outstanding balance without an IA. Each is fixable. A denial is not the end of the matter; it is a specific objection that can be addressed before a second call or a written request. A client who wants to understand why the abatement was denied is entitled to a written explanation, which the practitioner can request or frame via a follow-up written submission. See the IRS collection alternatives comparison guide for how penalty abatement fits within the broader collection resolution toolkit before the practitioner escalates to an installment agreement or offer in compromise. For a client who genuinely cannot pay, currently not collectible (CNC) status can suspend active collection under a hardship standard while an abatement request is pursued.
Form 843: Section-by-Section Completion for FTA Requests
Form 843 (Claim for Refund and Request for Abatement) is the correct tool when a penalty has already been paid and the client is seeking a refund of that paid amount. A PPS call can remove an assessed-but-unpaid penalty from the account; it cannot generate a refund check for amounts already remitted. Form 843 is also used to request abatement of interest under IRC Section 6404 (interest attributable to IRS error or delay), and is an alternative mechanism for written abatement requests when a formal paper record is preferred even for unpaid penalties. Reducing the installment agreement balance through abatement is a direct practical benefit; see the installment agreement practitioner guide for how abatement interacts with the IA payment stream.
The statute of limitations under IRC Section 6511 controls Form 843 refund claims. The claim must be filed within the later of: two years from the date the penalty was paid, or three years from the date the return was filed. The two-year rule from payment is most commonly the operative deadline. A claim filed one day after the statute expires is permanently barred; there are no equitable exceptions. Verify current Section 6511 rules at IRS.gov before advising any client on a paid-penalty refund claim.
Lines 1-2: Tax period and taxpayer identification
Enter the specific tax period (calendar year or fiscal year end) for which the penalty was assessed and paid. Enter the SSN or EIN exactly as it appears on IRS records. A mismatch routes the form to manual correction and adds weeks to processing. For a practitioner filing on the client's behalf, attach Form 2848 and include the practitioner's CAF number.
Line 3: Dollar amount of the claim
Enter the exact dollar amount of the penalty paid. Use the figure from the IRS notice or the account transcript, not an estimate. If claiming across multiple periods or multiple penalty types, itemize each with its period and amount, then enter the total. The IRS processes the claim against the amount stated; a figure that does not match the account record triggers a correction request.
Line 4: Type of tax
Check the box for income tax, employment tax, estate or gift tax, or excise tax to reflect which tax type the penalty relates to. For most individual and small business FTA cases, the selection is income tax or employment tax. The Form 843 instructions at IRS.gov list the applicable tax types for each penalty category.
Line 5: IRC section, penalty type, and explanation
This is the substantive section. Cite the specific IRC section for the penalty (for example, IRC Section 6651(a)(1) for failure to file). Write a clear factual explanation of the basis for abatement. For an FTA request, state: (1) the taxpayer filed all required returns for the three prior years, or obtained extensions; (2) no failure-to-file, failure-to-pay, or failure-to-deposit penalty was assessed for the three prior years; (3) the underlying tax is paid in full or the taxpayer has an active installment agreement; and (4) the taxpayer qualifies for the IRS first-time abatement administrative waiver. The explanation must be specific enough that an IRS employee can evaluate the claim without contacting you. For a reasonable cause request, the explanation must describe the specific facts, when the event occurred, and how it directly prevented timely compliance.
Signature, attachments, and mailing
The form must be signed by the taxpayer, or by an authorized representative with a valid Form 2848 on file. Attach supporting documentation: copies of relevant returns, extension confirmations for prior years, IA documentation, or evidence supporting a reasonable cause claim. Mail Form 843 by certified mail with return receipt to the IRS service center address listed in the current Form 843 instructions (verify current mailing addresses at IRS.gov). Retain a complete copy of the filed form, all attachments, and the mailing receipt with tracking confirmation in the client file.
Reasonable Cause: The Legal Standard, Five Categories, and the IRS Reasonable Cause Assistant
Reasonable cause is the alternative abatement route when FTA or AEP is not available: the client has a prior penalty in the three-year look-back window, received FTA in a prior year, or holds a penalty type that FTA does not cover. Unlike FTA, reasonable cause requires establishing specific facts. The IRS legal standard, drawn from the Treasury Regulations and case law under IRC Section 6664, is whether the taxpayer "exercised ordinary business care and prudence" in trying to meet their tax obligations and the failure was caused by circumstances beyond their control.
The five primary reasonable cause categories
- Serious illness or incapacitation: A medical condition that prevented the taxpayer from filing or paying on time. The condition must have been severe enough to make it genuinely impossible to meet the obligation; a chronic but manageable condition that could have been worked around carries less weight than an acute hospitalization. Documentation: medical records or a physician's statement confirming the condition, its severity, and the period of incapacitation. The IRS will compare the dates to the deadline.
- Death in the immediate family: The death of a spouse, child, parent, or other household member in the period immediately before the filing or payment deadline. Timing matters: a death six months before the deadline is harder to connect to the failure than one occurring in the week before it. Documentation: death certificate, and documentation of the taxpayer's role as executor, surviving caregiver, or primary affected party.
- Natural disaster or casualty: A fire, flood, hurricane, or other event that destroyed records or made compliance physically impossible. Documentation: insurance claims, police or fire reports, FEMA disaster registration, or contemporaneous evidence of the disaster. If records were destroyed, state that explicitly; it is a concrete consequence that directly connects to the filing failure.
- Reliance on professional advice: The taxpayer relied in good faith on written advice from a competent tax professional who incorrectly advised on a filing or payment obligation. This requires that the advisor was qualified, was given accurate information, gave written advice (not oral), and the taxpayer actually followed the advice and did not simply ignore the obligation. The IRS reviews these claims carefully; documentation of the advice and evidence of reliance are required.
- Erroneous IRS advice: The taxpayer received incorrect written advice directly from the IRS and followed that advice in good faith. This is one of the stronger reasonable cause bases, but it requires producing the IRS written correspondence and demonstrating that the taxpayer followed it accurately. Under IRC Section 6404(f), abatement of interest attributable to erroneous IRS advice can also be requested through Form 843.
The IRS Reasonable Cause Assistant as a screening tool
The IRS operates an internal decision support tool called the Reasonable Cause Assistant (RCA) that IRS employees use when evaluating reasonable cause claims. The RCA is not publicly available to practitioners, but understanding how it works shapes how to present a claim. The RCA steps through a structured set of questions about the penalty type, the taxpayer's compliance history, and the specific facts presented. Claims that check the boxes the RCA is looking for (specific incapacitating event, clear timeline, documented evidence, and prompt compliance once the circumstance resolved) fare better than vague narratives. Draft every reasonable cause statement as if it needs to answer each of those questions in sequence.
Drafting the Reasonable Cause Statement: Structure, Evidence, and Denial Response
A reasonable cause statement is not a hardship letter. It is a structured factual presentation that mirrors the IRS's own evaluation criteria. The IRS does not respond to appeals to sympathy; it responds to facts that satisfy the legal standard. The following structure covers the required elements in the order the IRS looks for them.
Part one: Identify the specific event or circumstance. Name it precisely (for example, "acute cardiac event requiring hospitalization from March 10 through April 20, 2025") and state the exact dates. Vague claims like "health issues during filing season" do not meet the standard. The IRS needs to be able to place the event on a timeline relative to the filing deadline.
Part two: Connect the event directly to the failure. Explain specifically how the event prevented the taxpayer from filing or paying on time. This is not implied by the severity of the event; it must be stated. If the taxpayer was hospitalized from March 10 through April 20 and the filing deadline was April 15, the connection is clear from the dates. But state it anyway: "During the period from March 10 through April 20, the taxpayer was unable to gather records, complete return preparation, or arrange payment."
Part three: Ordinary business care and prudence before the event. Address what the taxpayer was doing before the event to meet their tax obligations. This matters because "ordinary business care and prudence" is the affirmative standard, not just an absence of willfulness. A taxpayer who had gathered their documents and was working with a preparer before the event occurred shows a different fact pattern than one who had not yet started.
Part four: Prompt compliance after the circumstance resolved. State when the circumstances resolved and when the taxpayer filed or paid. The IRS expects compliance to follow as soon as reasonably possible after the incapacitating event ends. A taxpayer who was hospitalized through April 20 and filed on April 25 presents a stronger fact pattern than one who waited until July.
Evidence requirements: Attach whatever contemporaneous documentation exists to support the stated facts. Medical records, physician letters, death certificates, insurance claims, disaster documentation, copies of advisor correspondence. Do not attach everything in the client file; attach what directly corroborates the specific claim.
When the IRS sends a denial letter: Read the specific grounds for denial, not just the outcome. The IRS is required to state why the claim was denied. A denial on the grounds of insufficient evidence is different from a denial on the grounds that the facts do not meet the standard. If the denial is factual ("the dates provided do not establish incapacity during the filing period"), the response is to supply additional evidence. If the denial is legal ("the circumstances described do not constitute reasonable cause"), the response is to appeal to IRS Appeals, where an independent reviewer applies the same standard afresh. See the section below on the Appeals pathway and the IRS Appeals practitioner protest guide for the protest drafting workflow.
The OBBBA Error Scenario: Reasonable Cause When IRS Programming Generated the Penalty
The 2026 filing season introduced a new category of reasonable cause scenario that practitioners must understand: penalties assessed as a direct consequence of erroneous IRS MeF business rule rejections triggered by OBBBA-related programming changes. TIGTA's interim results of the 2026 filing season (verify the exact report designation at tigta.treas.gov) found that 19 of 29 MeF business rules examined appeared to either reject returns in error or without accurate explanation. Among the rules with documented issues were those associated with OBBBA-added provisions including the Child Tax Credit, SALT deduction modifications, Adoption Credit, and Schedule 1-A.
When a practitioner's timely-filed electronic return was rejected by an erroneous MeF business rule, and the practitioner was unable to correct the error (because the rule rejection itself was incorrect, not the return), and the rejection window closed before the practitioner could resolve the issue, any resulting failure-to-file penalty can be challenged on reasonable cause grounds. The argument rests on two overlapping theories: first, erroneous IRS advice or IRS system error as a recognized reasonable cause category; and second, the taxpayer's (and practitioner's) exercise of ordinary business care and prudence in attempting timely electronic filing, frustrated by an IRS-side programming failure.
Building the argument requires documentation at each step. The practitioner should retain: the original electronic return submission date and timestamp; the rejection acknowledgment (XACK) with the specific reject code; IRS QuickAlerts or IRS published guidance acknowledging the relevant rule as problematic, if any; the TIGTA interim report noting the 19-of-29 finding (cited with the hedge that the exact report number should be verified at tigta.treas.gov); any retransmission attempts and their outcomes; and the date on which the return was ultimately filed (paper or electronic). See the IRS e-file rejection codes practitioner guide for how to document rejection codes and the retransmission workflow that precedes the reasonable cause argument.
The reasonable cause statement for an OBBBA error scenario should follow the same four-part structure described above, substituting the IRS programming error for the incapacitating event: (1) the specific erroneous rejection, with the rule number and the documented IRS acknowledgment of the error; (2) the direct connection between the rejection and the late filing; (3) the practitioner's timely submission and repeated attempts to resolve the rejection; and (4) the prompt paper or corrected filing once the error was identified. Verify current IRS guidance on OBBBA-related MeF error abatement at IRS.gov before submitting. The IRS may issue specific guidance or a systemic relief program for OBBBA-related erroneous rejections; check for IRS notices and QuickAlerts.
Practitioners handling trust fund situations where a payroll-related OBBBA error created a penalty exposure should also review the TFRP practitioner guide, as trust fund recovery penalties are separately abatable and follow a distinct procedural pathway from standard civil penalties.
Accuracy-Related Penalty Abatement: IRC Section 6662 and the Substantial Authority Defense
Accuracy-related penalties under IRC Section 6662 are fundamentally different from failure-to-file, failure-to-pay, and failure-to-deposit penalties. They arise not from a timing failure but from the examination of the return's substantive positions. FTA does not apply to Section 6662 penalties. The abatement process for these penalties takes place within the examination or in Appeals, not through a PPS phone call or a standalone written request to the campus.
The most common Section 6662 penalties practitioners encounter are the substantial understatement penalty (20 percent of the underpayment attributable to a substantial understatement) and the negligence or disregard of rules penalty (also 20 percent). A substantial understatement generally exists when the understatement exceeds the greater of 10 percent of the correct tax or $5,000 (verify current thresholds at IRS.gov). For corporate taxpayers the standards differ; confirm the applicable threshold for the entity type.
The primary defense against the substantial understatement penalty is the substantial authority standard under IRC Section 6662(d)(2)(B). If there was substantial authority (a legal standard generally described as a more-likely-than-not threshold supported by case law, regulations, legislative history, or IRS rulings) for the treatment claimed on the return, the penalty may not apply even if the IRS ultimately prevails on the underlying position. The argument must be made in the exam or in Appeals; it is not an administrative abatement request. The practitioner who prepared the return must be prepared to identify the specific authorities supporting the return position.
Reasonable cause and good faith is the alternative defense under IRC Section 6664(c). The taxpayer may avoid the Section 6662 penalty by showing they had reasonable cause for the underpayment and acted in good faith, including through reliance on a qualified tax professional who was given accurate information. This defense is evaluated based on all facts and circumstances and is distinct from the reasonable cause standard applicable to failure-to-file penalties.
Section 6751(b) Supervisory Approval: A Procedural Challenge When Manager Sign-Off Was Not Documented
IRC Section 6751(b) requires that certain penalties be personally approved by the IRS employee's immediate supervisor before initial assessment. The provision was added by Congress in 1998 with the stated purpose of preventing IRS employees from using penalties as a bargaining tool. The Tax Court's decision in Graev v. Commissioner (149 T.C. 485 (2017)) and subsequent Tax Court decisions gave Section 6751(b) significant practical effect, holding that a penalty assessed without documented supervisory approval could be procedurally invalid.
However, the supervisory approval requirement under Graev and subsequent Tax Court decisions is not a universal remedy. Verify the current scope and application of Section 6751(b) at IRS.gov before raising it as a procedural challenge in any specific case. The scope of Section 6751(b), including which penalties require approval and at what procedural stage the approval must occur, has been the subject of extensive litigation, and the case law continues to develop. Practitioners who raise this challenge must be current on the most recent Tax Court and Circuit Court decisions addressing the specific penalty type and procedural posture at issue. A 6751(b) argument raised incorrectly, or at the wrong stage, can undermine an otherwise valid abatement or appeals position.
When requesting the IRS's administrative record in an examination or at Appeals, practitioners should ask specifically for the supervisory approval documentation relevant to any penalty in the notice. If the documentation is absent or deficient, that fact supports a Section 6751(b) argument. The argument is most appropriately raised in a formal protest to IRS Appeals, or in Tax Court if the case reaches that stage, rather than in an administrative abatement request to the campus. For penalties that have been denied at the abatement stage and are heading to Appeals, see the section below and the CDP hearing guide, as penalty abatement can be raised at a Collection Due Process hearing as well.
After Denial: The Appeals Pathway and Tax Court Review
A denied abatement request is not a final determination. The IRS Independent Office of Appeals provides an administrative review that is distinct from the function that made the initial determination. An Appeals officer applies the same reasonable cause standard but independently, and without the institutional investment of the initial reviewer. For well-documented reasonable cause arguments that were denied at the campus level, Appeals is a meaningful second chance, and a significant percentage of penalty cases are resolved at the Appeals level.
The pathway to Appeals after a denied abatement depends on the procedural posture of the case. For a standalone penalty abatement request denied in a CP letter: the denial letter will identify the request for an appeals conference. The practitioner submits a protest letter stating the specific grounds for disagreement and requesting an Appeals conference. For cases already in collection (a Notice of Federal Tax Lien filed, a levy issued, or a CDP notice received): the CDP hearing provides an independent review of both the underlying liability and the collection action, and penalty abatement can be raised as part of the CDP request. For cases where the penalty arose from an examination: abatement arguments are raised through the normal examination appeals process with a formal written protest. See the IRS Appeals practitioner protest guide for the protest format and conference request workflow. When the penalty stems from a jointly co-filed return and one spouse bears no responsibility for the item that generated it, evaluate IRC 6015 innocent spouse relief separately from the abatement request, since it can remove that spouse's joint and several liability for the penalty and the underlying tax alike.
Tax Court review of penalty decisions is available, but typically only after the taxpayer has exhausted the administrative appeals process and received a notice of deficiency or a CDP determination. Tax Court is the correct venue for Section 6662 accuracy-related penalty disputes that survive Appeals, and for Section 6751(b) supervisory approval arguments that require adjudication. For most FTF/FTP/FTD abatement matters, the administrative pathway through Appeals resolves the dispute without litigation.
One important timing point: do not confuse the penalty abatement process with the CDP process. If the client receives a CDP notice (Notice of Intent to Levy or Notice of Federal Tax Lien with a 30-day window), the CDP deadline is a hard statutory deadline. Missing it forfeits the right to a full CDP hearing (with Tax Court review of the underlying liability) and converts the hearing to an Equivalent Hearing (without Tax Court review). Penalty abatement requests do not extend or toll the CDP response window. Handle both tracks simultaneously and promptly if both arise at the same time.
Regulated Claims and Verification Requirements
Verify all of the following before relying on them in client engagements: (1) AEP timeline: AEP was announced July 8, 2026 (IR-2026-83) and applies to returns with original due dates on or after January 1, 2027; FTA remains available through December 31, 2026 for all return years; verify current AEP scope at IRS.gov. (2) Penalty rates: failure-to-file 5 percent/month to 25 percent; failure-to-pay 0.5 percent/month to 25 percent, 1 percent after levy notice; failure-to-deposit 2 to 15 percent by lateness; verify current rates at IRS.gov. (3) Section 6751(b) scope: verify current application and limitations under Graev v. Commissioner and subsequent Tax Court decisions at IRS.gov before raising as a procedural challenge. (4) TIGTA filing season report: 19-of-29 MeF business rule finding; verify exact report designation at tigta.treas.gov. (5) Form 843 statute of limitations: IRC Section 6511 two-year rule from payment date; verify at IRS.gov. No abatement outcome is guaranteed. This guide is informational and does not constitute legal or tax advice.
Frequently Asked Questions
What is the difference between AEP and legacy FTA, and when does AEP replace FTA?
The IRS announced the Automatic Exemption from Penalty program on July 8, 2026 (IR-2026-83). AEP applies to eligible returns with original due dates on or after January 1, 2027, beginning with 2026 tax year returns filed in 2027. For 2025 returns (due April 15, 2026 or October 15, 2026 with extension), legacy FTA remains the applicable abatement route; AEP does not cover 2025 returns. During the transition period through December 31, 2026, both AEP and legacy FTA remain available on parallel tracks. Beginning January 1, 2027, AEP replaces FTA as the primary automatic abatement mechanism for returns due on or after that date. AEP-eligible forms include Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1; the program excludes information returns and infrequent-event returns such as Forms 706 and 709. Verify current AEP implementation details at IRS.gov before advising clients.
Which penalties are NOT eligible for first-time abatement or AEP?
AEP and legacy FTA both exclude accuracy-related penalties under IRC Section 6662 (substantial understatement, negligence), civil fraud penalties under IRC Section 6663, estimated tax underpayment penalties under IRC Section 6654, and FBAR penalties assessed under Title 31. Information return penalties under IRC Sections 6721 and 6722 are separately abatable but follow different criteria. Practitioners must identify the specific penalty code section on the IRS notice before requesting abatement to confirm the penalty is eligible.
When must Form 843 be used instead of a PPS phone call?
Form 843 (Claim for Refund and Request for Abatement) is required when the penalty has already been paid and the practitioner is seeking a refund of that paid amount. A PPS phone call removes assessed-but-unpaid penalties from the account; it cannot generate a refund for amounts already remitted to the IRS. Form 843 is also the correct mechanism for requesting abatement of interest under IRC Section 6404 for interest attributable to IRS error or delay. The statute of limitations under IRC Section 6511 applies: the claim must be filed within the later of two years from payment or three years from the return's filing date. Verify current Section 6511 rules at IRS.gov before advising clients.
How do OBBBA-triggered MeF programming errors support a reasonable cause argument?
TIGTA's interim 2026 filing season report found that 19 of 29 MeF business rules examined appeared to either reject returns in error or without accurate explanation, with OBBBA-related rules among those flagged. When an IRS programming error generated an erroneous rejection that caused a return to be filed late, the erroneous rejection itself may constitute a reasonable cause basis for abatement of any resulting failure-to-file penalty. The practitioner's argument rests on the taxpayer's inability to file timely due to an IRS-side system failure. Documentation should include the rejection acknowledgment, the specific reject code, any IRS QuickAlerts or notices regarding the relevant rule, and the TIGTA report designation (verify at tigta.treas.gov). Verify current IRS guidance on OBBBA-related error abatement at IRS.gov.
What is the supervisory approval requirement under IRC Section 6751(b) and how does it affect penalty challenges?
IRC Section 6751(b) requires that certain penalties be personally approved by an IRS supervisor before initial assessment. Under Graev v. Commissioner and subsequent Tax Court decisions, a penalty assessment made without documented supervisory approval may be procedurally invalid. However, the scope of this requirement has been actively litigated, and not every penalty type is covered by the supervisory approval rule. This defense is not a universal remedy and its application depends heavily on the specific penalty type, the procedural posture of the case, and current case law. Verify the current scope of Section 6751(b) and its application to the specific penalty and case posture at IRS.gov and through current Tax Court decisions before raising as a procedural challenge.