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I'm running 3.5 also - just updated tonight.
The plugin just seems to ignore any specific tag entered in the "Exclude Terms by ID".
I hadn't changed that part - the setting is still on "Select". If the setting is changed to Include or Exclude, a "Post ID" box populates. But I thought that is just for referencing specific posts by their ID number. Basically I thought the setting doesn't affect the "Exclude Terms by ID" box, just the Post ID box that comes up.
That could be used to exclude particular posts entered manually, but I want to set it up so posts with the tag "how-to" (tag ID: 7) are filtered out automatically.