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TAX COURT HOLDS ITIN DOES NOT SATISFY IDENTIFICATION REQUIREMENT FOR 2021 RECOVERY REBATE CREDITOn September 3, 2026, th...
02/11/2026

TAX COURT HOLDS ITIN DOES NOT SATISFY IDENTIFICATION REQUIREMENT FOR 2021 RECOVERY REBATE CREDIT

On September 3, 2026, the United States Tax Court (Court) decided Ortiz v. Commissioner, Docket No. 13093-25, in which the Court granted the Commissioner of Internal Revenue's Motion for Judgment on the Pleadings under Rule 120(a).

Petitioner, Ivan Merida Ortiz, filed a petition under Section 6213(a) of the United States Internal Revenue Code (Code) seeking redetermination of a $1,400 income tax deficiency for the 2021 taxable year. The deficiency stemmed from the Internal Revenue Service’s disallowance of petitioner's claimed 2021 economic recovery rebate credit under Section 6428B. Petitioner had utilized an Individual Taxpayer Identification Number (ITIN) rather than a Social Security Number (SSN) on his 2021 tax return and additionally sought recovery of a disputed 2020 rebate credit.

We hereby highlight the Court’s analysis.

I. Court’s Analysis

- Ineligibility of ITIN Holders Under Section 6428B: The Court held that Petitioner was statutorily ineligible for the $1,400 credit. Under Section 6428B(e)(2)(A), the statutory credit amount is treated as zero unless the return contains a “valid identification number”. Section 6428B(e)(2)(D)(i) explicitly defines a valid identification number as an SSN issued by the Social Security Administration on or before the return's due date. Distinguishing an ITIN from an SSN pursuant to Treasury Regulation § 301.6109-1(d)(3)(i), the Court noted that tax credits are a matter of legislative grace and Petitioner’s use of an ITIN conclusively demonstrated the absence of an SSN. Consequently, the Commissioner was entitled to judgment as a matter of law.

- Jurisdictional Bar Regarding Unnotified Tax Years: Regarding Petitioner's request for 2020 relief, the Court dismissed the claim for lack of subject-matter jurisdiction. As a court of limited statutory jurisdiction, the Court’s deficiency and overpayment jurisdiction under Section 6213(a) and 6512(b) extends exclusively to taxable years included in the Statutory Notice of Deficiency (SNOD). Because respondent’s SNOD applied solely to tax year 2021, the Court lacked authority to adjudicate claims pertaining to tax year 2020. Accordingly, the Court granted respondent's motion and entered decision in favor of respondent.

&TaxLawyers

TAX COURT REJECTS SOCIAL MEDIA INFLUENCER’S CELEBRITY-EVENT DEDUCTIONS On August 18, 2026, the United States Tax Court (...
26/10/2026

TAX COURT REJECTS SOCIAL MEDIA INFLUENCER’S CELEBRITY-EVENT DEDUCTIONS

On August 18, 2026, the United States Tax Court (Court) decided Sami v. Commissioner, Docket Nos. 8834-23 and 16512-23, in which it considered deficiencies and accuracy-related penalties arising from tax years 2019 through 2021.

I. Background

Taxpayer worked in information technology while operating an LLC, a disregarded entity engaged in transportation services, event-ticket sales, and purported social-media influencing. He reported substantial Schedule C receipts but, during the years at issue, earned no advertising revenue from his social-media activities.

Taxpayer incurred significant expenses for celebrity encounters and exclusive events, including the Grammys, Emmys, meetings with actors and athletes, and other experiences obtained largely through charitable organizations. Although he originally claimed many of these expenditures as charitable contributions, he later argued that they were deductible marketing expenses because the resulting social-media content increased followers, views, and potential future revenue. The Commissioner disallowed those deductions and numerous other expenses.

We hereby highlight the Court’s analysis.

II. Court’s Analysis

- Business Purpose and Substantiation - The Court emphasized that Section162(a) of the United States Internal Revenue Code (Code) permits deductions only for ordinary and necessary expenses primarily incurred in carrying on a trade or business, while Section 262 prohibits deductions for personal expenses. Applying that standard, the Court concluded that Sami’s celebrity-event expenditures were primarily personal rather than business motivated. The possibility that the experiences generated social-media attention or later economic benefits did not transform primarily personal expenditures into deductible business expenses.

The Court also found significant substantiation deficiencies. Taxpayer maintained no formal books, frequently commingled personal and business expenditures, and generally relied on bank and credit-card statements that failed to identify what was purchased or establish a business purpose. Accordingly, the Court denied claimed cost of goods sold, contract-labor expenses, television and streaming costs, general marketing expenses, and the celebrity-related marketing expenditures.

- Expenses Allowed or Partially Allowed: The Court nevertheless allowed several deductions where the evidence established a sufficient business connection. Because Taxpayer used his vehicles directly to transport persons for compensation, the strict substantiation requirements applicable to listed passenger automobiles did not apply. Using the Cohan rule, the Court allowed 80% of his estimated vehicle, toll, and parking expenses. It also allowed documented credit-card processing fees and 25% of claimed cellular-service expenses, reflecting a reasonable estimate of business use.

- QBI and Accuracy-Related Penalties: The Court held that Taxpayer’s Schedule C income from transportation and ticket sales constituted qualified business income under Section 199A because those activities were qualified trades or businesses. However, the Court sustained Section 6662(a) accuracy-related penalties. Although the IRS satisfied the supervisory-approval requirements of Section 6751(b), Taxpayer failed to establish reasonable cause and good faith. His accounting education, inadequate recordkeeping, and failure to document business purposes demonstrated a lack of ordinary business care and prudence. The Court therefore concluded that the disallowed deductions remained improper, the Schedule C income generated QBI, and the accuracy-related penalties applied.

&TaxLawyers

PUERTO RICO SUPREME COURT REAFFIRMS LIMITS ON PROPERTY REGISTRAR’S AUTHORITY TO REVIEW JUDICIAL DETERMINATIONSOn August ...
19/10/2026

PUERTO RICO SUPREME COURT REAFFIRMS LIMITS ON PROPERTY REGISTRAR’S AUTHORITY TO REVIEW JUDICIAL DETERMINATIONS

On August 13, 2026, the Puerto Rico Supreme Court (Court) decided Registrar of Property, Humacao Section v. Ernesto Hernández Lebrón, 2026 TSPR 90, in which it addressed the scope of a Property Registrar’s authority when reviewing a judicial resolution submitted for registration.

The controversy arose from a declaration of heirs concerning the estate of Justina Vicens Vallejo. Although Vicens Vallejo had executed an open will in 2006, two parcels were acquired after the will’s ex*****on. The Court of First Instance concluded that those later-acquired properties were not covered by the testamentary dispositions and therefore were subject to intestate succession.

When the declaration of heirs was presented for registration as to property No. 19,667 in Las Piedras, the Registrar refused registration. He reasoned that the will’s clause referring to “any other property that exists” encompassed property owned by the decedent at death, including property acquired after ex*****on of the will. On that basis, the Registrar concluded that the property should pass according to the testamentary scheme rather than the declaration of heirs. The interested parties argued that the Registrar had exceeded the statutory limits of the registration-review function by reinterpreting the will and contradicting a judicial determination.

We hereby highlight the Court’s analysis.

I. Court’s Analysis

The Court relied principally on Article 229 the Puerto Rico Real Property Registry Act. When the document presented for registration is issued by a judicial authority, the Registrar’s review is limited to the court’s jurisdiction, the nature and effects of the resolution, whether essential procedural requirements were observed, the document’s external formalities, and the Registry’s prior entries. The Registrar may extend or deny a registration entry, but may not revisit, adjudicate, or correct controversies already resolved by a court.

The Court held that the Registrar’s objection did not concern jurisdiction, formal validity, essential procedure, or a Registry-based impediment. Instead, it reflected substantive disagreement with the Court of First Instance’s interpretation of the will. Because the trial court had considered the will and expressly determined that the later-acquired properties were outside its testamentary provisions, the Registrar could not reinterpret the clause or substitute his judgment for that of the court. Allowing such review would impermissibly transform the Registrar into a “judge of judges.”

The Court revoked the Registrar’s final determination and ordered registration of the Court of First Instance’s resolution concerning property No. 19,667. It further emphasized that any third party claiming superior inheritance rights retains the procedural mechanisms available to challenge a declaration of heirs; such concerns do not authorize the Registrar to disregard a valid judicial resolution.

Chief Justice Oronoz Rodríguez concurred, stressing that declarations of heirs are issued without prejudice to third parties and may later be challenged through the appropriate judicial procedure available.

&TaxAttorneys

PUERTO RICO SUPREME COURT REQUIRES JUDICIAL DETERMINATION OF SUCCESSOR HEIRS BEFORE RECORDING REPUDIATION OF AN ALREADY-...
12/10/2026

PUERTO RICO SUPREME COURT REQUIRES JUDICIAL DETERMINATION OF SUCCESSOR HEIRS BEFORE RECORDING REPUDIATION OF AN ALREADY-REGISTERED HEREDITARY INTEREST

On August 3, 2026, the Supreme Court of Puerto Rico (Court) issued its opinion in Rivera del Valle v. Registrador de la Propiedad (2026 TSPR 83), upholding the Property Registrar's decision to refuse registration of a public deed repudiating an inheritance.

We hereby highlight the Court’s holding.

I. Background

The legal dispute arose following the intestate death of Israel Rivera Rosado in March 2022, who co-owned real property situated in Las Piedras, Puerto Rico. In September 2022, a judicial declaration of heirs designated his surviving spouse and three children (including petitioner Annaise Rivera del Valle) as universal heirs. Consequently, abstract hereditary rights for all named heirs were recorded in the Property Registry.

Thereafter, petitioner executed Deed No. 50 of 2024 to formally repudiate her inheritance share in favor of her co-heirs, subsequently executing Amendatory Act No. 12-2025 to state that her repudiation extended to her descendants. Upon presenting these instruments to the Property Registry of Humacao I, the Property Registrar, Hon. José A. Maymó Azize, issued a negative qualification. The Registrar determined that because hereditary rights were already registered under a judicial declaration, petitioner was required to present a supplementary judicial resolution identifying the specific individuals called to inherit the repudiated portion. After a denied motion for recalibration, petitioner filed an administrative appeal before the Supreme Court.

II. Court’s Holding

In an opinion delivered by Associate Justice Kolthoff Caraballo, the Court held that where hereditary rights are previously recorded under a judicial declaration of heirs, submitting a supplementary judicial resolution establishing the identity of parties called to succeed the repudiated portion constitutes an indispensable condition precedent for recording the repudiation. Procedurally, the Court dismissed a distinct assignment of error regarding an unrelated presentation entry for lack of jurisdiction.

Substantively, the Court emphasized that repudiation is a unilateral, irrevocable act that cannot be made conditionally or extended to deny succession rights to one's lineage. Petitioner's attempt to extend repudiation to her descendants was legally impermissible, providing the Registrar valid cause to question the document's validity. To protect registry accuracy and successive chain of title (tracto sucesivo), the new hereditary call resulting from representation or accretion must be formally proven through competent authority. Because original rights were registered via judicial decree, an amending judicial resolution is required.

Associate Justice Colón Pérez concurred in the result, agreeing that registration was properly denied because petitioner impermissibly attempted to repudiate for her descendants. However, Justice Colón Pérez expressed concern that mandating a judicial resolution to identify substitute heirs establishes an unwarranted administrative requirement not expressly provided by current statutory law.

&TaxLawyers

FEDERAL COURT DISMISSES APA CHALLENGE TO $723,993 FOREIGN-GIFT REPORTING PENALTIESOn July 30, 2026, the United States Di...
05/10/2026

FEDERAL COURT DISMISSES APA CHALLENGE TO $723,993 FOREIGN-GIFT REPORTING PENALTIES

On July 30, 2026, the United States District Court for the Northern District of California (Court), decided Zhang v. IRS, Docket No. 5:26-cv-00525, dismissing Ziyue Zhang’s (Taxpayer) Administrative Procedure Act (APA) challenge to penalties imposed by the Internal Revenue Service (IRS) under Section 6039F of the United States Internal Revenue Code (Code) for failing to timely report foreign gifts.

We hereby highlight the Court’s analysis and decision.

I. Background

Taxpayer, who moved from China to the United States shortly before 2017, received gifts exceeding $100,000 from family members in China during 2017 and 2018. Although taxpayers receiving foreign gifts above the statutory threshold generally must report them on Form 3520, Taxpayer did not timely file the required forms.

After learning of the requirement, Taxpayer filed late Forms 3520 in March 2019 for 2017 and September 2020 for 2018. In April 2021, the IRS assessed penalties of $49,985 and $674,008, totaling $723,993, representing 25% of the foreign gifts received. Taxpayer sought relief based on reasonable cause, but the IRS denied her request, stating that ignorance of the tax law did not establish reasonable cause. Her subsequent request for review by the IRS Independent Office of Appeals received no response.

Taxpayer filed suit in January 2026 asserting four APA claims, including alleged due process violations, arbitrary and capricious agency action, and the imposition of an allegedly automatic penalty contrary to Section 6039F(c)(2). She sought relief setting aside the penalties and remanding the matter to the IRS or IRS Appeals for reconsideration.

The IRS moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), arguing that APA review was unavailable because Taxpayer had adequate alternative judicial remedies. It also raised Article III standing, the Anti-Injunction Act, and the Declaratory Judgment Act. A separate Rule 12(b)(6) argument became moot after Zhang clarified that she was not asserting a standalone constitutional due process claim.

II. Court’s Analysis

Because Taxpayer clarified at oral argument that she did not assert a standalone Due Process Clause claim, the Court deemed the Rule 12(b)(6) motion moot and resolved the case under Rule 12(b)(1).

Addressing sovereign immunity, the Court held that while APA § 702 waives immunity for non-monetary relief, APA § 704 strictly limits judicial review to agency actions "for which there is no other adequate remedy in a court."

The Court rejected Taxpayer’s characterization that her action challenged only administrative procedures. Because her requested relief sought to vacate the individual penalty determinations, her lawsuit constituted a substantive challenge to her tax liability. A tax-refund suit under Section 7422 of the Code, requiring full prepayment of penalties under Flora v. United States, provides an adequate alternative remedy. A taxpayer's failure to prepay penalties does not render the statutory refund mechanism inadequate.

Additionally, if the IRS initiates collection efforts via tax levies or liens under Section 6502, Taxpayer can challenge penalty liability without prepayment in a Collection Due Process (CDP) hearing under Sections 6320 and 6330 of the Code, with judicial review available in the U.S. Tax Court.

Because these two adequate alternative statutory remedies foreclose APA jurisdiction, and because Taxpayer conceded that amendment would be futile, the Court granted Taxpayer’s motion to dismiss without leave to amend.

&TaxLawyers

INTERNAL REVENUE SERVICE PROPOSE RULES ON SECTION 898 TRANSITION TAXES AND SECTION 960 FOREIGN TAX CREDIT DISALLOWANCEOn...
28/09/2026

INTERNAL REVENUE SERVICE PROPOSE RULES ON SECTION 898 TRANSITION TAXES AND SECTION 960 FOREIGN TAX CREDIT DISALLOWANCE

On July 31, 2026, the Internal Revenue Service (IRS) issued proposed regulations (REG-115145-25; 91 F.R. 48794–48807) under Sections 898(c) and 960(d)(4) of the United States Internal Revenue Code (Code). These regulations govern the allocation of foreign taxes accrued by specified foreign corporations (SFCs) affected by the repeal of the one-month deferral election. Additionally, the rules implement provisions restricting foreign tax credits (FTCs) on distributions of previously taxed earnings and profits (PTEP) derived from Section 951A inclusions.

We hereby highlight various provisions of the proposed regulations.

I. Section 898(c) Foreign Tax Allocation Rules

Section 70352 of the OBBBA repealed the Section 898(c)(2) one-month deferral election for taxable years of SFCs beginning after November 30, 2025. Affected corporations that previously utilized deferral must adjust their taxable year to match their majority United States shareholder's required year, resulting in a short initial taxable year. Proposed Treasury Regulation § 1.898(c)-1 addresses tax mismatches by allocating specified foreign income taxes between an affected corporation's short first required year and its succeeding taxable year.

Specified foreign income taxes generally comprise foreign net income taxes accrued under an accrual accounting method. The framework applies a default allocation percentage based on foreign law taxable income principles derived from Treasury Regulation § 1.1502-76(b). Taxpayers may elect alternative treatments, including:

- Allocating distributive shares of creditable foreign tax expenditures (CFTEs) from affected partnerships;

- Allocating relevant succeeding year taxes when foreign and U.S. taxable years do not align;

- Forgoing allocation entirely and recognizing foreign income taxes in the short first required year.

II. Section 960(d)(4) Foreign Tax Credit Disallowance

Section 70312 of the OBBBA increased the Section 960(d)(1) deemed-paid FTC percentage for GILTI inclusions from 80 percent to 90 percent while establishing Section 960(d)(4). This provision disallows a foreign tax credit for 10% of foreign income taxes paid, accrued, or deemed paid on distributions of PTEP resulting from Section 951A inclusions.

Proposed Treasury Regulation § 1.960-3 operationalizes this mandate by bifurcating the Section 951A PTEP group into pre-June 29, 2025 PTEP and post-June 28, 2025 PTEP. The 10%-disallowance applies strictly to foreign taxes attributable to Section 959(a) distributions of post-June 28, 2025 Section 951A PTEP and reclassified post-June 28, 2025 Section 951A PTEP.

III. Compliance Procedures and Applicability

Elections under Proposed Treasury Regulation § 1.898(c)-1 must be executed by controlling domestic shareholders by attaching designated election statements to Form 5471 filed with timely tax returns.

Finally, public comments and hearing requests are due by September 17, 2026, with finalization anticipated by January 4, 2027.

&TaxLawyers

FEDERAL CLAIMS COURT INVALIDATES TREASURY REGULATION RESTRICTING GILTI AMORTIZATION DEDUCTIONSOn July 2, 2026, the Unite...
21/09/2026

FEDERAL CLAIMS COURT INVALIDATES TREASURY REGULATION RESTRICTING GILTI AMORTIZATION DEDUCTIONS

On July 2, 2026, the United States Court of Federal Claims (Court) held in Keysight Technologies, Inc. & Subsidiaries v. United States, Docket No. 25-137, that the Department of the Treasury (Treasury) lacked statutory authority to promulgate Treasury Regulation 1.951A-2(c)(5).

I. Background

Keysight, a multinational technology company, sought federal income tax refunds for the 2020, 2021, and 2022 tax years. The dispute involved Section 197 amortization deductions arising from transactions involving controlled foreign corporations (CFCs). Keysight maintained that the deductions were properly allocable to its CFCs’ gross tested income and therefore should reduce its GILTI inclusions under Section 951A of the Internal Revenue Code (Code).

Treasury Regulation 1.951A-2(c)(5), however, classified deductions associated with “disqualified basis” as allocable solely to residual CFC gross income. This treatment effectively prevented Keysight from using the amortization deductions to reduce income subject to GILTI taxation.

We hereby highlight the Court’s analysis.

II. Court’s Analysis

- Application of Loper Bright and Statutory Authority - The Court analyzed the case through the framework of Loper Bright Enterprises v. Raimondo, which recently overruled Chevron deference and unambiguously reassigned statutory interpretive authority to the courts. The United States argued that the Treasury possessed broad rulemaking authority under Section 7805(a) and specific gap-filling authority under Section 951A(c)(2)(A)(ii) to define which deductions are “properly allocable”. The government also relied on Section 954(b)(5), asserting that Congress expressly permitted the Treasury to prescribe regulations regarding these deductions. The Court firmly rejected the government’s stance. Judge Tapp found that Section 7805(a) alone does not grant the Secretary unfettered discretion to restructure federal law simply because the agency disapproves of a congressional omission. Such an interpretation would render Loper Bright meaningless by presumptively validating virtually all agency regulations. Furthermore, the Court determined that the plain text of Section 951A(c) is altogether ambiguous and lacks any language granting specific authority to the Secretary. The Court also noted that Section 954(b)(5) explicitly limits the Secretary’s regulatory authority to foreign base company income, not GILTI.

- Skidmore Deference and Final Ruling - while Loper Bright permits courts to seek guidance from agency interpretations under Skidmore v. Swift Co., such interpretations are only afforded weight based on their thoroughness, validity, and power to persuade. Evaluating the Treasury’s interpretation of the undefined statutory phrase “properly allocable”, the Court looked to historical definitions and legislative intent. Keysight demonstrated that legislative intent supported a definition rooted in a factual relationship test, rather than the expansive definition adopted by the Treasury. Ultimately, the Court found the Treasury's interpretation lacked both persuasive reasoning and consistency. Permitting an administrative agency to resolve statutory ambiguities without a clear congressional grant of authority constitutes the exact overreach that Loper Bright was designed to foreclose. Consequently, the Court found that the Treasury lacked the authority to promulgate Treasury Regulation 1.951A-2(c)(5).

&TaxLawyers

Grateful to Fulcro for inviting Valerm Law Group to participate in Who’s Next In Your Business?, a conversation between ...
18/09/2026

Grateful to Fulcro for inviting Valerm Law Group to participate in Who’s Next In Your Business?, a conversation between corporate/tax lawyers, CPAs, financial planners and financial advisors on the legal and financial aspects of business succession and business acquisitions.

&TaxLawyers

PUERTO RICO SUPREME COURT DEFINES “INTERESTED PARTY” AND LIMITS THE REGISTRAR’S AUTHORITY TO REVIEW RECORDED RESTRICTION...
14/09/2026

PUERTO RICO SUPREME COURT DEFINES “INTERESTED PARTY” AND LIMITS THE REGISTRAR’S AUTHORITY TO REVIEW RECORDED RESTRICTIONS

On June 18, 2026, the Supreme Court of Puerto Rico (Court) issued an opinion in the case of Jonathan Rosario Collazo and Ediris Caro Rivera v. Hon. Aminda Colón Soto (2026 TSPR 66) in which it addressed the scope of a Property Registrar’s authority and interpreted who qualifies as an “interested party” under Article 244 of Act No. 210-2015, the Puerto Rico Real Property Registry Act.

The controversy involved a perpetual usufruct over municipal property in Aguada. The Registry reflected a restrictive condition prohibiting the assignment, transfer, donation, or sale of the usufruct without the prior consent of the Municipal Legislature. In 2019, the usufruct rights and the structure located on the property were conveyed through a deed of sale. When the deed was presented for recordation, the Registrar required evidence of municipal authorization.

The notary requested reconsideration, asserting that the restriction was void ab initio because the law under which the perpetual usufruct had originally been granted allegedly made the right transferable, inheritable, and alienable. The Registrar nevertheless denied recordation, reasoning that she lacked authority to invalidate or disregard a restriction already appearing in the Registry.

We hereby highlight the Court’s analysis.

I. Court’s Analysis

- Standing and the "Interested Party" Doctrine- addressing the jurisdictional threshold, the Court interpreted the undefined statutory term “interested party” using a broad and functional legal approach. The Court determined that an interested party is any individual or entity who can demonstrate a real, direct legal interest in the registration or denial of a specific registry entry. Because the appellants’ property rights derived from Deed No. 46 were entirely dependent on the successful prior registration of Deed No. 209, they possessed a conditioned proprietary interest that fully satisfied the "interested party" requirement. Since the notary had timely filed the requisite Requalification Brief, the Court found that the jurisdictional prerequisites to hear the appeal were properly met.

- Scope of the Registrar's Authority- ruling on the substantive merits, the Court reinforced the principle that a Property Registrar's adjudicatory function is inherently limited. The Registrar is solely responsible for verifying the legality of documents to uphold the registry's public faith, thereby ensuring only perfectly valid acts are officially recorded. However, this role strictly excludes adjudicating rights, resolving substantive legal disputes, or performing judicial tasks. The Court emphasized that registered acts are legally presumed valid until formally nullified by a judicial decree. Because the municipal restriction was a previously registered condition encumbering the property, the Registrar acted lawfully by requiring compliance and denying the new inscription. The Court concluded that determining the constitutionality of a registered clause significantly exceeds the Registrar's authority; such constitutional matters must be exclusively litigated and resolved before a trial court.

&TaxLawyers

INTERNAL REVENUE SERVICE INTRODUCES AUTOMATIC PENALTY RELIEF FOR TAXPAYERS WITH STRONG COMPLIANCE HISTORIESOn July 8, 20...
07/09/2026

INTERNAL REVENUE SERVICE INTRODUCES AUTOMATIC PENALTY RELIEF FOR TAXPAYERS WITH STRONG COMPLIANCE HISTORIES

On July 8, 2026, the Internal Revenue Service (IRS) announced the creation of the Automatic Exemption from Penalty program (AEP), a systemic administrative relief procedure intended to provide qualifying taxpayers with automatic relief from certain federal tax penalties. The new program will replace the IRS’s long-standing First Time Abate administrative relief and is expected to begin operating during the summer of 2026.

AEP is designed to reduce the administrative burden on taxpayers who have consistently complied with their federal tax filing and payment obligations. Unlike First Time Abate, eligible taxpayers will not be required to affirmatively contact the IRS or submit a formal request for relief.

We hereby highlight the new program.

I. Eligibility and Covered Penalties

AEP will generally apply to eligible original returns beginning with tax year 2025, quarterly returns filed for periods beginning in 2026, and qualifying returns for subsequent tax periods.

To qualify, a taxpayer must have timely filed the applicable return and paid all taxes due during the preceding three years. For quarterly returns, the taxpayer must demonstrate timely compliance for the preceding 12 consecutive quarters.

For eligible taxpayers, the IRS will refrain from assessing the following penalties during return processing:

- Failure-to-file penalties;
- Failure-to-pay penalties; and
- Failure-to-deposit penalties.

When relief is granted, the IRS will issue a notice confirming the taxpayer’s eligibility and the application of AEP.

II. Returns Excluded from Automatic Relief

Not all federal tax returns will qualify for AEP. Information returns and returns filed in connection with specific transactions or infrequent events will generally be excluded. The IRS specifically identified Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, as examples of returns that are generally ineligible.

III. Transition from First Time Abate

The IRS will begin phasing out First Time Abate during the summer of 2026. Because the transition will occur gradually, some taxpayers who otherwise qualify for relief may continue to receive penalty notices relating to tax year 2025 returns or 2026 quarterly returns. During this transitional period, affected taxpayers may contact the IRS and request relief under the existing First Time Abate procedures.

AEP will fully replace First Time Abate for eligible returns with original filing due dates on or after January 1, 2027.

IV. Reasonable-Cause Relief Remains Available

Taxpayers who do not qualify for AEP may continue to request penalty abatement based on reasonable cause. The IRS will evaluate those requests under its existing administrative standards and notify taxpayers of its determination.

AEP does not eliminate the taxpayer’s underlying liability. Taxpayers remain responsible for paying all taxes and accrued interest, together with any penalties that are not covered by the automatic relief program.

&TaxLawyer

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