Dana Lee CPA LLC Team

Taxpayers and business owners have long had access to penalty relief under specific circumstances, but claiming that relief traditionally required contacting the IRS directly. Under IRS Notice IR-2026-83, the agency is fundamentally changing this process by launching the Automatic Exemption from Penalty (AEP).

This new systemic program automatically waives common penalties for compliant taxpayers without requiring formal requests, written letters, or phone calls. Here is everything you need to know about how AEP works, who qualifies, and how it replaces the long-standing First Time Abate (FTA) policy.

What Is the Automatic Exemption from Penalty (AEP)?

The Automatic Exemption from Penalty (AEP) is a new administrative relief mechanism designed to simplify penalty waivers and reduce burden for compliant taxpayers. Historically, taxpayers with clean compliance records had to proactively request First Time Abate (FTA) after receiving a penalty notice.

Under AEP, when an eligible tax return is processed late or with unpaid balances, the IRS automatically evaluates the taxpayer’s compliance history. If criteria are met, the IRS suppresses penalty assessment upfront and mails a notice confirming that automatic relief was applied. Taxpayers do not need to take any action or contact the IRS to receive this exemption.

Covered Penalties and Eligible Tax Forms

AEP applies to specific routine penalties assessed during return processing.

Penalties Covered Under AEP

• Failure to File: Applies to individual tax returns [IRC Sec. 6651(a)(1)], partnership returns [IRC Sec. 6698(a)(1)], and S corporation returns [IRC Sec. 6699(a)(1)].

• Failure to Pay: Applies when tax shown on the return is not paid by the due date [IRC Sec. 6651(a)(2)] or when tax required to be shown is not paid by the date stated in an IRS notice or demand [IRC Sec. 6651(a)(3)].

• Failure to Deposit: Applies when employment or corporate taxes are not deposited in the correct amount, within the prescribed time period, or in the required manner [IRC Sec. 6656].

Eligible Return Forms

AEP consideration is available for the following return series:

• Individual & Business Income Tax: Forms 1040, 1065, and 1120.

• Employment Tax Returns: Forms 940, 941, 943, 944, and 945.

Excluded Returns & Penalties

AEP does not cover all filings or penalty types. Ineligible items include:

• Information returns.

• Returns filed only in response to specific transactions or infrequent events, such as Form 706 (U.S. Estate Tax Return) and Form 709 (United States Gift Tax Return).

• The Daily Delinquency Penalty (DDP) or information reporting dependent on another filing.

Qualification Criteria: Do You Qualify for AEP?

To qualify for AEP, taxpayers must demonstrate a timely compliance history prior to the filing period in question.

General Eligibility Requirements

1. Prior Compliance Period: You must have timely filed the same return type for the prior three tax years (or 12 consecutive quarters for quarterly filers).

2. Clean Penalty Record: Either no penalties (excluding estimated tax penalties) were assessed during the lookback period, or any assessed penalties were later abated due to reasonable cause or IRS error.

Additional Business Return Rules

Business taxpayers must meet two extra conditions to qualify for Failure to Deposit penalty relief under AEP:

• The IRS must not have waived failure-to-deposit penalties four or more times during the prior three years (or 12 quarters).

• The failure to deposit penalty was not charged for Electronic Federal Tax Payment System (EFTPS) avoidance.

Key Differences: First Time Abate (FTA) vs. Automatic Exemption from Penalty (AEP)

The IRS is transitioning from First Time Abate to AEP. While both target taxpayers with strong compliance records, the delivery mechanism is fundamentally different.

Feature	First Time Abate (FTA)	Automatic Exemption from Penalty (AEP)
Applicable Timeframe	Eligible 2025 tax year & 2026 quarterly returns, plus all prior tax years	Eligible 2025 tax year returns, 2026 quarterly returns, and all future tax periods
Relief Mechanism	Manual / Not automatic	Fully Automatic
Taxpayer Action	Taxpayer must contact the IRS to request relief	No taxpayer action required
Penalty Assessment	Penalty is assessed first, then removed upon approval	No penalty assessment is made during return processing
Failure to Pay Accrual	Penalty may continue to accrue until tax is fully paid	Does not accrue and is not assessed on unpaid tax

Implementation Timeline & Transition Period

The transition from First Time Abate to AEP follows a phased schedule:

1. Effective Starting Dates: AEP applies to original returns for the 2025 tax year and 2026 quarterly returns going forward.

2. Summer 2026 Phased Rollout: The IRS begins phasing out FTA and rolling out AEP during the summer of 2026.

3. Transition Rules: During the summer 2026 transition, some qualifying taxpayers may still receive penalty notices for eligible 2025 or 2026 returns. Taxpayers who receive a notice but believe they qualify can still contact the IRS to request First Time Abate manually.

4. Full Automation Target: AEP will fully replace First Time Abate for eligible returns with original due dates on or after January 1, 2027.

Important Taxpayer Considerations

• Tax and Interest Still Due: AEP waives administrative penalties, but it does not eliminate underlying tax liabilities or interest charges accrued on unpaid balances. You still remain responsible for paying the tax and interest due.

• Reasonable Cause Relief Remains Available: Taxpayers who fail to meet the three-year compliance history for AEP can still apply for penalty relief under traditional reasonable cause guidelines. The IRS will review reasonable cause requests individually.

If you seek “CPA near you for business tax savings” or “how to legally reduce taxes for small businesses,” choose us and schedule a consultation today.

Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice and that new changes in rules and regulations may render this content out of date.

We’ve all seen the late-night commercials or gotten the sketchy robocalls: “Qualify for the Fresh Start Program!” “We can wipe away your IRS tax debt for pennies on the dollar!” As a tax professional, I can see the aftermath of these predatory companies. They prey on fear, charging stressed-out taxpayers thousands of dollars in upfront fees for “resolutions” they rarely deliver.

Fortunately, the IRS just launched a game-changing digital feature that puts the power back in your hands. It’s the official Tax Debt Help tool. It allows you to cut out the sketchy middlemen entirely to find out exactly where you stand—for free.

What is the IRS Tax Debt Help Tool?

The Tax Debt Help tool is a user-friendly, interactive digital application built directly into the official IRS website. The IRS designed it to make tax compliance less intimidating, clearer, and accessible to the everyday taxpayer.

In a recent announcement, IRS Chief Executive Officer Frank J. Bisignano highlighted the significance of this launch:

“This new Tax Debt Help tool reflects the agency’s commitment to making tax compliance clearer, more accessible, and less intimidating for taxpayers. By guiding taxpayers through their options to pay with simple, interactive questions, we’re helping them understand the paths available and take confident next steps. The deployment of this new tool shows the transformation underway at the IRS and the progress the agency has already made to deliver more user-friendly, digital-first services to taxpayers.”

Instead of navigating complex tax codes or paying a third party to do it, you can now answer a few straightforward questions online to see your personalized path forward.

How It Works: Finding Your Legitimate Relief Options

The beauty of this tool is its simplicity. It walks you through a series of structured, interactive questions about your current financial situation, income, and total tax debt.

Based on your unique answers, the tool evaluates your data. It instantly guides you toward the official IRS payment and resolution options you actually qualify for. These options generally include:

• Installment Agreements (Payment Plans): Setting up structured monthly payments that fit your budget.

• Temporary Delay of Collections: Getting placed in a “Currently Not Collectible” status if paying your tax debt right now would cause severe financial hardship.

• Offer in Compromise (OIC): A legitimate agreement between a taxpayer and the IRS that settles a tax liability for less than the full amount owed.

Why You Should Use This Tool Before Hiring a “Tax Relief” Company

Predatory tax relief companies often use high-pressure sales tactics to convince you that they have a “secret loophole” to erase your debt. In reality, they are usually just submitting the exact same paperwork you could fill out yourself. Even worse, many people pay these companies thousands of dollars only to find out they didn’t even qualify for an Offer in Compromise in the first place.

With the new Tax Debt Help tool, you get transparency without the price tag. You can verify your eligibility directly with the IRS database before you ever consider hiring professional representation.

Key Benefits of the Tool:

• 100% Free: No hidden fees, no retainer agreements, and no monthly subscriptions.

• Completely Anonymous: You can run scenarios through the interactive questionnaire to see your options before formally submitting a request.

• Direct & Accurate: The logic comes straight from the IRS, meaning no false promises or misleading claims.

Take Control of Your Tax Debt Today

If you are dealing with back taxes, the worst thing you can do is ignore the problem or panic and hand your credit card over to a random company making promises that sound too good to be true.

Skip the scams, head over to the official IRS website, and use the Tax Debt Help tool to understand your options.

Is your business prepared for the IRS’s new digital era?

Don’t wait for a notice to arrive. Let’s review your current tax position and ensure your business is protected.

Schedule a Consultation with Dana Lee CPA Today

Please note that this blog post is for informational purposes only. It does not constitute tax, legal or accounting advice. New changes in rules and regulations may render this content out of date.

Key Takeaways

• On January 16, 2026, the U.S. Court of Appeals for the Fifth Circuit reversed a Tax Court decision in Sirius Solutions, L.L.L.P. v. Commissioner, ruling in favor of limited partners.
• The court held that “limited partner” status under IRC Section 1402(a)(13) is determined by state law liability status — not by how active a partner is in the business.
• The ruling exempts qualifying limited partners from self-employment (SE) tax on their distributive share of partnership income.
• The decision applies directly to taxpayers in Texas, Louisiana, and Mississippi (Fifth Circuit jurisdiction).
• Similar cases are pending in the First and Second Circuits, making a Supreme Court showdown possible.

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Introduction: A Landmark Self-Employment Tax Victory for Limited Partners

If you are a limited partner in a business partnership, January 16, 2026 may be one of the most important dates in your tax history. On that date, the U.S. Court of Appeals for the Fifth Circuit issued a landmark ruling in Sirius Solutions, L.L.L.P. v. Commissioner, handing a significant victory to limited partners across the country — and potentially saving thousands of taxpayers substantial amounts in self-employment taxes.

This case directly addresses one of the most contested questions in partnership tax law: When can a limited partner exclude their distributive share of partnership income from self-employment tax?

The answer, according to the Fifth Circuit, is simpler than the IRS would like you to believe.

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Background: What Is Self-Employment Tax and Why Does It Matter?

Self-employment (SE) tax is the 15.3% tax — covering Social Security (12.4%) and Medicare (2.9%) — that applies to net earnings from self-employment. For high-earning partners in profitable partnerships, SE tax can amount to tens of thousands or even hundreds of thousands of dollars annually.

Under Internal Revenue Code Section 1402(a)(13), the distributive share of income from a partnership attributable to a limited partner is generally excluded from net earnings subject to self-employment tax. This exclusion was designed to recognize that limited partners are passive investors, not active workers generating earned income.

The problem? The IRS has spent years arguing that this exclusion is narrower than it appears — and the Tax Court had agreed with them.

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The IRS’s “Functional Analysis” Argument

For years, the IRS applied a so-called “functional analysis test” to determine whether a partner truly qualifies as a “limited partner” for SE tax purposes. Under this approach, the IRS looked beyond the legal structure of the partnership to examine how actively involved the partner was in the business.

If a partner performed services for the partnership — even if they held limited liability under state law — the IRS would argue they were not a “real” limited partner and therefore could not claim the Section 1402(a)(13) exclusion. The Tax Court had endorsed this functional approach, creating uncertainty and audit exposure for countless limited partners nationwide.

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Who Is Sirius Solutions?

Sirius Solutions, L.L.L.P. is a Houston, Texas-based management consulting firm that provides staffing and consulting services. The firm was organized as a limited liability limited partnership (LLLP) under Texas state law, meaning its partners had limited personal liability for the debts and obligations of the partnership.

The IRS audited Sirius Solutions and sought to reclassify over $5 million of the partners’ distributive share income as earnings subject to self-employment tax, arguing that because the partners actively worked in the business, they did not qualify for the limited partner exclusion under Section 1402(a)(13).

The Tax Court sided with the IRS, applying the functional analysis test and concluding that the active involvement of the Sirius Solutions partners disqualified them from limited partner status for SE tax purposes.

Sirius Solutions appealed.

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The Fifth Circuit’s Ruling: Back to Basics

On January 16, 2026, a divided Fifth Circuit panel — voting 2-to-1 — reversed the Tax Court and ruled in favor of Sirius Solutions.

The majority rejected the IRS’s functional analysis test entirely. Instead, the court applied a straightforward, state law-based definition: a “limited partner” under Section 1402(a)(13) is simply a partner whose liability for the partnership’s debts is limited under state law. Full stop.

The court reasoned that Congress used the term “limited partner” in its well-established legal sense — a partner who enjoys limited liability protection under applicable partnership law. The court found no basis in the statute’s text, history, or structure to import an additional “how active are you” requirement that the IRS had invented through regulatory guidance.

Because Sirius Solutions’ partners held limited liability status under Texas law, they qualified as limited partners and their distributive share income was excluded from self-employment tax.

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Why This Ruling Is So Important

1. It Rejects the IRS’s Expansive Reading of Self-Employment Tax

The Fifth Circuit’s decision is a direct rebuke of the IRS’s long-standing effort to expand the reach of self-employment tax beyond what Congress intended. By anchoring the definition of “limited partner” to state law rather than to a nebulous functional test, the court creates a clear, administrable rule that both taxpayers and the IRS can follow.

2. It Affects a Wide Range of Business Structures

The ruling has immediate relevance for:

• Investment fund managers structured as limited partnerships
• Professional service firms (law, consulting, accounting) organized as LLLPs or LPs
• Real estate partnerships where partners hold limited liability status
• Private equity and venture capital funds where general partner economics flow through limited partner entities

If you are a limited partner in any of these structures and your partnership is organized under state law that grants you limited liability, your distributive share income may be excluded from self-employment tax — regardless of how active you are in the business.

3. The Potential Tax Savings Are Substantial

For a partner earning $500,000 in distributive share income, the difference between paying and not paying self-employment tax could exceed $21,000 per year (applying the 2.9% Medicare portion on all income plus the 12.4% Social Security portion on income up to the wage base). Over multiple years, these savings compound significantly.

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Geographic Scope: Who Is Directly Covered?

The Fifth Circuit’s ruling is binding precedent for federal courts in Texas, Louisiana, and Mississippi. Taxpayers in these states who are structured as limited partners in state-law limited partnerships are in the strongest position to rely on this decision.

Taxpayers in other states are not bound by the Fifth Circuit ruling, but the decision carries persuasive authority and may influence other courts, the IRS, and ultimately Congress.

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The Dissent and the Road Ahead

The Fifth Circuit was not unanimous. One judge dissented, arguing that the majority’s plain-text approach was too rigid and that Congress likely intended a more functional inquiry into the nature of a partner’s involvement.

The dissent reflects a genuine disagreement in tax law — and it signals that this fight is far from over.

Pending Cases in Other Circuits

Two closely related cases are currently on appeal in other federal circuits:

• First Circuit (covering Massachusetts, Maine, New Hampshire, Rhode Island, Puerto Rico)
• Second Circuit (covering New York, Connecticut, Vermont)

If either of these circuits rules differently than the Fifth Circuit, there will be a circuit split — a direct conflict between federal appellate courts on the same legal question. A circuit split on a question of this magnitude would make Supreme Court review highly likely.

Will the IRS Appeal?

The IRS could petition the U.S. Supreme Court to hear the Sirius Solutions case directly, even without waiting for a circuit split. Given the dollar amounts at stake and the IRS’s long-standing reliance on the functional analysis test, an appeal cannot be ruled out.

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What About LLCs and LLPs?

An important limitation of the Fifth Circuit’s ruling is that it applies specifically to partners in limited partnerships (LPs) and limited liability limited partnerships (LLPs) where state law grants limited liability to the partners in question.

The ruling does not directly address:

• Members of LLCs taxed as partnerships — a massive category of business entities where the self-employment tax question remains heavily contested
• General partners in any partnership type
• Partners in limited liability partnerships (LLPs) where the extent of limited liability may differ from state to state

These remain open and actively litigated questions that taxpayers and their advisors need to monitor closely.

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Action Steps: What Should You Do Now?

If You Are Currently a Limited Partner in an LP or LLLP in the Fifth Circuit

Talk to your tax advisor immediately. You may be entitled to:

1. Exclude current-year distributive share income from self-employment tax on your 2025 and 2026 returns
2. File amended returns for open tax years (generally the last three years) to claim refunds of self-employment taxes paid on income that should have been excluded
3. Review your partnership agreement to confirm your liability status under applicable state law

If You Are Outside the Fifth Circuit

The ruling is persuasive but not binding. Discuss with your tax advisor whether to:

• Take a protective position on current returns citing the Fifth Circuit ruling
• Await further developments in the First or Second Circuit cases
• Consider restructuring options that would place you under Fifth Circuit jurisdiction

If You Are an LLC Member

Your situation is different and more uncertain. The SE tax treatment of LLC members remains one of the most contested areas of partnership tax law. Consult a qualified tax professional to assess your exposure and options.

If you seek “CPA near you for business tax savings” or “how to legally reduce taxes for small businesses,” choose us and schedule a consultation today.

Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice and that new changes in rules and regulations may render this content out of date.

In a significant move toward modernization, the IRS Whistleblower Office recently announced the launch of the digital Form 211, Application for Award for Original Information. Announced via IR-2025-123, this new electronic filing option marks a shift away from cumbersome paper trails, allowing individuals to report tax fraud and noncompliance securely from their phone or laptop.

As a business owner or high-net-worth individual, understanding these enforcement tools is critical—not just for compliance, but for ensuring a fair playing field in your industry.

What is IRS Form 211?

Form 211 is the gateway for whistleblowers to provide specific, timely, and credible information regarding tax evasion or fraud. In exchange for this “original information” that leads to the collection of unpaid taxes, the IRS offers monetary awards.

The Impact: Since 2007, the Whistleblower Office has awarded over $1.4 billion to individuals, helping the government recover more than $7.86 billion in lost revenue.

Key Highlights of the New Digital Submission Process

The shift to a digital Form 211 isn’t just about convenience; it’s about accuracy and speed.

• Reduced Errors: Digital entry minimizes transcription mistakes that often occur with paper forms.

• Faster Processing: Electronic submissions go directly to the Whistleblower Office, bypassing traditional mail delays.

• Accessibility: You can now securely upload supporting documents and personal details via the IRS website.

How Much Are the Awards?

If the information provided leads to a successful collection, a whistleblower is generally eligible for 15% to 30% of the amount the IRS collects. To be eligible, the information must be specific and credible—vague “tips” rarely result in awards.

What Information Do You Need to File?

To submit a digital claim, you will need:

1. Subject Details: Name, address, and TIN (if known) of the entity or individual.

2. Detailed Allegations: A clear description of how the tax law was violated.

3. Supporting Evidence: Any documents or records that prove the noncompliance.

4. Relationship Context: Your connection to the subject (e.g., former employee, competitor, or contractor).

Confidentiality and Protection

Many potential whistleblowers worry about retaliation. The IRS is legally bound to protect the identity of whistleblowers to the fullest extent possible. Additionally, the U.S. Department of Labor provides protections against employer retaliation under Whistleblowers.gov.

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Why Compliance Matters for Your Business

While the whistleblower program is a tool for enforcement, it serves as a reminder for all business owners: Tax compliance is your best defense. In an era of digital reporting and high-incentive whistleblower programs, ensuring your books are airtight and your filings are accurate is more important than ever.

At Dana Lee CPA, we help business owners navigate complex IRS regulations, stay ahead of digital filing trends, and ensure their tax strategies are both aggressive and compliant.

Is your business prepared for the IRS’s new digital era?

Don’t wait for a notice to arrive. Let’s review your current tax position and ensure your business is protected.

Schedule a Consultation with Dana Lee CPA Today

Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice and that new changes in rules and regulations may render this content out of date.

The United States Tax Court recently issued a definitive ruling run regarding unreported income because of frivolous tax arguments (T.C. Memo. 2025-93), solidifying established tax law and imposing a significant penalty on the petitioner for advancing tax frivolous, recycled arguments.

This case serves as a sharp warning against adopting discredited tax protester positions, especially when previously warned by the Court. The Tax Court sustained the IRS’s deficiency determination, upheld an addition to tax for failure to file a valid return, and imposed a $10,000 penalty under Section 6673.

The Unreported Income and Deficiency

 

The core of the dispute concerned petitioner’s 2018 tax year.

• The Facts: During 2018, the taxpayer was employed by Frontier Communications Corp. (or a related entity) as a customer service technician, receiving wages of $102,533, as reported on an amended Form W-2.

• The Petitioner’s Return: The taxpayer filed a Form 1040 “zero return,” reporting zero income on all lines except for a reported federal income tax withholding of $7,844, for which he claimed a full refund.

• The Court’s Finding: The Tax Court, citing established law that “compensation for services” (wages) is gross income under Section 61(a)(1), found that the petitioner failed to report the $102,533 in wages. The Court sustained the IRS’s resulting deficiency of $16,016.

The Rejection of Frivolous Tax Arguments

 

Throughout the proceeding, the petitioner raised a long list of arguments commonly associated with tax protesters. In addition he had previously raised these arguments before and he had been warned about in two earlier Tax Court cases (for his 2017 and 2019 tax years).

These frivolous tax arguments included:

• Wages Are Not Income: Arguing that there was no “taxable activity” or that the income tax is an excise tax that doesn’t apply to him.

• Lack of Contract: Asserting there is no “contract” between him and the IRS to pay a tax.

• Citizenship Defense: The primary argument he pressed at trial was that he is “not a U.S. citizen” and therefore not taxable, relying on a letter from the Department of Homeland Security (DHS) that stated no records responsive to his FOIA request regarding his citizenship were located.

The Court summarily rejected the citizenship argument as frivolous, refusing to “refute petitioner’s frivolous argument with somber reasoning and copious citation of precedent” to avoid suggesting it has any merit (Crain v. Commissioner).

Penalty for Invalid Return: Addition to Tax Sustained

 

The IRS determined two potential penalties: an accuracy-related penalty under Section 6662(a) and, alternatively, an addition to tax for failure to file a timely return under Section 6651(a)(1).

1. Accuracy-Related Penalty (Section 6662(a)): NOT Sustained

 

The Court first had to determine if the “zero return” filed by the taxpayer was a valid return. Using the Beard v. Commissioner test, the Court found the return was invalid because:

• It lacked sufficient data to calculate tax liability (it contained only zero income entries).

• It did not represent an honest and reasonable attempt to satisfy the requirements of the tax law.

Because a valid return is required to impose the Section 6662(a) accuracy-related penalty, the Court held that the petitioner was not liable for this penalty.

2. Failure to File Addition to Tax (Section 6651(a)(1)): SUSTAINED

 

Since the zero return was not a valid return, the petitioner was deemed to have failed to file a required income tax return for the year. The Court found that the petitioner failed to show that his failure was due to reasonable cause and not willful neglect.

The Tax Court therefore sustained the Section 6651(a)(1) addition to tax for failure to timely file, as asserted by the Commissioner.

Section 6673 Penalty Imposed: $10,000 Sanction

 

The most severe consequence was the imposition of a Section 6673 penalty. The government can impose this penalty when a taxpayer institutes a proceeding primarily for delay or when their position is frivolous or groundless.

The Court took judicial notice of the petitioner’s prior history, which included:

• Two previous Tax Court cases involving similar zero returns and frivolous arguments.

• A previous $5,000 Section 6673 penalty imposed in the 2017 tax year case.

• An explicit promise in a later 2019 tax year case to “cease any further frivolous tax arguments” before the Court.

Despite these warnings and a previous sanction, the taxpayer persisted with the frivolous citizenship argument in this case. The Court found his actions represented a pattern of behavior primarily intended to delay the collection of federal income tax.

Given the fact that the petitioner wasted judicial resources and he disregard for prior warnings, the Court granted the Commissioner’s motion and imposed a substantial $10,000 penalty on the taxpayer.

Key Takeaways

• Wages Are Income: Compensation for services is unequivocally taxable gross income under Section 61. “Zero returns” are invalid and subject taxpayers to penalties.

• Frivolous Tax Arguments Are Costly: The Tax Court has no patience for tax protester arguments that have been repeatedly rejected under settled law. The Court will sanction these repeated arguments with penalties up to $25,000 under Section 6673.

• Invalid Returns = Failure to File: The IRS does not consider a “zero return” that does not provide sufficient data to calculate tax liability to be a valid return and can subject you to the Section 6651(a)(1) addition to tax.

If you seek “CPA near you for business tax savings” or “how to legally reduce taxes for small businesses,” choose us and schedule a consultation today.

Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice and that new changes in rules and regulations may render this content out of date.