IRS Automates Penalty Relief, But What Happens to International Forms 5471 and 5472?
The IRS just automated one of its most commonly requested penalty waivers, eliminating the need to ask for relief. But for taxpayers navigating Forms 5471 and 5472, the change raises as many questions as it answers.
Relief without the request: FTA becomes the Automatic Exemption from Penalty
In IR-2026-83, the IRS announced that its long-standing First Time Abate waiver is being automated and renamed the Automatic Exemption from Penalty. Under AEP, qualifying taxpayers who file or pay late but have a clean compliance history for the prior three years (or twelve consecutive quarters for quarterly filers) will no longer be assessed failure-to-file, failure-to-pay, or failure-to-deposit penalties, and won't need to request relief.
AEP applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns; during the summer 2026 transition, FTA remains available on request for those periods, and AEP fully replaces FTA for returns with original due dates on or after January 1, 2027. This is genuinely good news, saving taxpayers the effort of calling or writing for a waiver that was routinely granted, and helping those who never knew FTA existed.
The eligibility gap. AEP is not universal. The news release lists Forms 706 (estate tax) and 709 (gift tax) as examples of ineligible event-based returns, along with information returns generally.
How FTA currently reaches international penalties
Even though FTA never applied to Forms 5471 and 5472 directly, two provisions of the Internal Revenue Manual created a path to relief. IRM 20.1.9.3.5 (Form 5471, under IRC 6038) and IRM 20.1.9.5.5 (Form 5472, under IRC 6038A) provide that a penalty systemically assessed when the form is attached to a late-filed Form 1120 or 1065 may be relieved if the failure-to-file penalty on the related Form 1120 or 1065 is abated under FTA, or would have been eligible for FTA had a penalty been assessed. In other words, the information return penalty rode along with FTA relief on the underlying business return.
Derivative relief under AEP?
The suppression problem. AEP acts as a penalty suppression at processing rather than a post-assessment abatement of the penalty. If the IRS intends the derivative relief to continue, IRM 20.1.9.3.5 and 20.1.9.5.5 will need to be updated to reference AEP where they now reference FTA. Whether that update happens, and whether it preserves the derivative relief in substance, has not yet been addressed.
International penalty relief for individual filers
The literal gap. On its face, IRM 20.1.9.3.5 provides for Form 5471 relief tied to a late-filed Form 1120 or 1065, not a late-filed Form 1040. Individuals frequently file Forms 5471 with their Forms 1040, yet the derivative provision does not mention the 1040. In practice, relief has been granted for individually filed Forms 5471 under the same principle, treating the late 1040 the way the IRM treats a late 1120 or 1065.
Likely oversight, but no guarantee. The transition to AEP brings this question to the surface. The omission of Form 1040 from IRM 20.1.9.3.5 was most likely an oversight rather than a deliberate policy choice, since the same rationale for relieving a 5471 penalty tied to a late 1120 or 1065 applies equally to one tied to a late 1040, and relief has in fact been granted for individually filed Forms 5471 under that principle. The 2022 Hinding memo, which directs Appeals to consider FTA on systemically assessed Form 5471 penalties, points the same way. It keys eligibility to the type of information return filed rather than the underlying 1120, 1065, or 1040, and simply cross-references IRM 20.1.9.3.5(3). A revised IRM referencing AEP would be the natural place to confirm it.
No request needed, but no choice either.
If a penalty is wrongly assessed where the IRS errs (for example, failing to recognize a valid extension), the correct remedy is reversal or correction rather than a waiver-based abatement. The IRM treats a fully reversed penalty as showing compliance for the period, so the reversal preserves the taxpayer's one-time FTA rather than using it up. A similar result can occur when reasonable cause is approved before FTA is reached, though that outcome is the exception because the IRM sequences FTA first.
With AEP applied automatically during return processing rather than on request, the ability to instead pursue reasonable cause up front appears eliminated. As for IRS errors, will taxpayers need to proactively monitor their transcripts and request correction from the IRS? Or will they need to show that AEP should not have applied in year one if they truly need it in year two?
For now, the practical answer is vigilance. Taxpayers who previously relied on requesting reasonable cause up front, or on the IRM's derivative relief for Forms 5471 and 5472, should monitor their account transcripts closely once AEP applies and be prepared to challenge an erroneous suppression or omission promptly, since the request-based safety net is disappearing along with the paperwork.
Facing an IRS Penalty? Let's Talk.
If you have unfiled international tax forms or received a penalty notice, the transition from FTA to AEP makes navigating abatement efforts more intricate and uncertain. Our team can help assess your options and prepare a well-documented response.
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This article is provided for general informational and marketing purposes only and does not constitute legal, tax, or accounting advice. Tax laws, deadlines, and penalty amounts change and depend on your specific facts and circumstances. You should not act or refrain from acting on the basis of this content without seeking advice from a qualified professional. Reading this article or contacting us does not create a client relationship.
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Unfair IRS penalty? You have options.
Many people pay the penalty to make it stop, or send one letter and hope. There is a better route. Sometimes it is a phone call and knowing which IRS unit to call and when. Often it is a well-organized written request, clearly explaining and documenting the facts and legal authority, sent to the correct IRS campus.
The sooner we see the notice, the more options we usually have.
Free penalty notice reviewRoss Martin, JD, authorized to represent taxpayers before the IRS.
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Can an IRS penalty be removed?
Often, yes. A penalty notice is an opening position, not a final assessment. There are four routes: proof that the return or payment was timely in the first place, the first-time waiver, reasonable cause, and statutory exceptions. More than one frequently applies to the same account, and the strongest is usually not the one most people reach for.
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Ross Martin, JD, is an international tax consultant authorized to represent taxpayers before the IRS. His practice centers on cross-border consulting, compliance, and IRS controversy, including planning and structuring advice, penalty abatement, international information return filings, and correcting account errors that generate assessments on returns filed on time.
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Common questions
Can an IRS penalty actually be removed?
Often, yes. A notice is an opening position, not a final assessment. There are four routes: proof that the return or payment was timely in the first place, the first-time waiver, reasonable cause, and statutory exceptions. Which one fits depends on the penalty, the account history, and what the transcript actually shows.
What does the first review cost?
Nothing. Send the notice and a short summary of what happened. The review tells you whether there is a case worth pursuing and which route is the strongest. If there is no realistic path, we will say so.
What do you need from me to start?
The notice itself, including the notice number and date, and a short description of what happened. Account transcripts matter as much as the return, because they show the due date the IRS used and the transaction code that generated the penalty. We can request those once we are authorized.
How long does penalty abatement take?
It varies widely. A straightforward account correction can post within days. A first-time waiver may resolve quickly or may require a written request, depending on current IRS policies and procedure. A documented reasonable cause request submitted in writing generally takes months, and information return penalties take longer still. Anyone quoting a fixed timeline is guessing.
What if I already paid the penalty?
Payment does not forfeit the claim. You can request abatement and a refund of the amount paid, subject to the refund limitations in section 6511, generally three years from the date the return was filed or two years from the date of payment, whichever is later.
Can you help if my accountant already tried and was denied?
Frequently. Denials often turn on how the request was framed rather than on the underlying facts. Two examples come up repeatedly. A request that says the return was timely, but does not cite the provision that made it timely, reads to the IRS as a disagreement rather than a correction. A reasonable cause request sent without supporting documentation draws a form letter. A denial is also not always the end of the road.
Do you work with taxpayers and businesses outside the United States?
Yes. Cross-border matters are the core of the practice, including US citizens living abroad, foreign corporations with US filing obligations, and withholding and foreign asset reporting penalties. Deadlines for filers outside the United States are frequently misapplied by IRS systems, which is one of the most common sources of penalties on returns that were filed on time.
What does authorized to represent taxpayers before the IRS mean?
It means we can speak to the IRS on your behalf, obtain your account transcripts, and submit and negotiate requests directly, once you sign an authorization. It is not the same as legal representation in court, and this is a tax practice rather than a law firm.
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