US Tax Agency Automatically Waives Penalties, Opens New Window for COVID-Era Refunds

From the official announcement by IRS ↗

The Internal Revenue Service (IRS) has announced two changes related to tax penalties that will affect tens of millions of taxpayers in the United States. First, the agency has officially replaced the First Time Abate program with a new process called Automatic Exemption from Penalty (AEP). According to the Journal of Accountancy, the old program required taxpayers to call, write, or contact the IRS themselves to request penalty relief. With AEP, if a taxpayer's records show that they have filed on time and paid taxes in full for three consecutive years (or 12 consecutive quarters for quarterly filers), the IRS will automatically remove late filing, late payment, and late deposit penalties and send a confirmation notice. The program begins rolling out in the summer of 2026 for 2025 tax returns and quarterly filings in 2026, then expands to future tax periods. By January 1, 2027, AEP will completely replace the old program. During the transition, some people may still receive penalty notices due to system errors and will need to contact the IRS themselves to request first-time penalty relief under the old rules, according to CPA Practice Advisor.

Second, and separate from AEP, the IRS has confirmed that a decision by the U.S. Court of Appeals in the case of Kwong v. United States could pave the way for tens of millions of people to receive refunds or cancellation of penalties and interest charged during the COVID-19 pandemic period, from January 20, 2020 to July 10, 2023. According to the IRS statement, the court ruled that the filing and payment deadline throughout this entire period should have been automatically extended under federal disaster relief law, meaning that filings made during that time should not be considered late. Most taxpayers must submit a refund claim before July 10, 2026 to protect this right; the IRS does not automatically issue refunds but rather requires taxpayers to proactively file a claim.

AEP applies to common return forms such as 1040, 1065, 1120, 940, and 941, while returns with specific circumstances such as estate or gift tax returns are not covered, according to Forbes. Both changes do not eliminate the underlying tax liability, only relate to penalties and a portion of interest. Readers should review the official IRS notice at the source link below to learn details applicable to their specific situation.

Analysis

For many years, the Taxpayer Advocate Service has urged the IRS to automatically apply first-time penalty relief rather than forcing taxpayers to know to request it. Erin Collins, who holds this position, has said that roughly 1 million taxpayers each year, mostly low-income earners, meet the criteria but do not know to apply. AEP is a direct response to this problem. The Kwong case, on the other hand, carries greater legal risk: the IRS has warned that the U.S. Department of Justice is expected to appeal the court's decision, meaning that the right to refunds of COVID-era penalties is not certain in the long term. The American Institute of Certified Public Accountants (AICPA) in March 2026 recommended that the IRS expand the scope of penalty relief, showing that pressure for reform continues even after this announcement.

Diaspora Impact

For taxpayers who have filed on time for three years, no action is needed to receive AEP; the system will automatically apply it and send a confirmation notice. However, anyone who was penalized for late filing or late payment during the COVID-19 period (from early 2020 to mid-2023), particularly nail salon owners, small restaurant operators, or elderly self-employed taxpayers who file without an accountant, should check immediately to see if they qualify for a refund under the Kwong case. Since the IRS deadline is July 10, 2026, readers who encounter this article after that date should contact the IRS directly or a tax attorney to inquire about their claim status and the possibility of an extension, and absolutely should not use intermediary services of unclear origin.