IRS Automatic Penalty Relief: What Taxpayers Need to Know
The IRS is changing how certain taxpayers receive relief from late-filing and late-payment penalties.
Beginning in summer 2026, the agency will introduce a new Automatic Exemption from Penalty program, or AEP. The program is intended to provide automatic relief to taxpayers who normally file and pay their taxes on time but miss a deadline.
Unlike the current First Time Abate process, eligible taxpayers generally will not need to call the IRS or submit a formal request. Instead, the IRS will review the taxpayer’s compliance history and apply qualifying relief automatically.
What Is the Automatic Exemption from Penalty Program?
The Automatic Exemption from Penalty program is a new administrative penalty relief process.
Under AEP, taxpayers who file or pay late may avoid certain penalties when they have a strong history of timely tax compliance.
When an eligible return is processed, the IRS will generally:
Review the taxpayer’s prior filing and payment history
Determine whether the taxpayer qualifies
Prevent eligible penalties from being assessed
Send a notice confirming that automatic relief was granted
Taxpayers generally will not need to contact the IRS or respond to a penalty notice to receive the relief.
This represents a significant change from First Time Abate, which normally requires taxpayers or their representatives to request penalty relief.
Who May Qualify for Automatic Penalty Relief?
To qualify for AEP, a taxpayer generally must have timely filed the applicable returns and paid the taxes due for the previous three years.
For quarterly filers, the IRS will review the previous 12 consecutive quarters.
This means the program is primarily designed for taxpayers who normally remain compliant but experience an isolated filing, payment, or deposit issue.
Eligibility will still depend on the taxpayer’s specific filing history, payment record, return type, and penalty involved.
Which Penalties May Be Covered?
Qualified taxpayers may receive automatic relief from certain:
Failure-to-file penalties
Failure-to-pay penalties
Failure-to-deposit penalties
AEP does not eliminate the underlying tax liability. Taxpayers must still pay all taxes owed, applicable interest, and any penalties that are not eligible for relief.
Interest generally continues to accrue on unpaid tax even when a penalty is removed.
Which Tax Returns Are Eligible?
The IRS has identified several return series that may qualify for AEP, including:
Individual and business income tax returns
Form 1040, U.S. Individual Income Tax Return
Form 1065, U.S. Return of Partnership Income
Form 1120 series corporate income tax returns
Employment tax returns
Form 940, Employer’s Annual Federal Unemployment Tax Return
Form 941, Employer’s Quarterly Federal Tax Return
Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
Form 944, Employer’s Annual Federal Tax Return
Form 945, Annual Return of Withheld Federal Income Tax
Form CT-1, Employer’s Annual Railroad Retirement Tax Return
The new process will initially apply to eligible original returns beginning with the 2025 tax year and eligible 2026 quarterly returns.
Which Returns Are Not Eligible?
Not every return or penalty will qualify for automatic relief.
The IRS has indicated that information returns and returns filed because of a particular transaction or infrequent event generally will not be eligible.
Examples include:
Form 706, United States Estate Tax Return
Form 709, United States Gift Tax Return
Other penalties, including certain accuracy-related, international reporting, or information return penalties, may also fall outside the scope of AEP.
Taxpayers facing penalties that are not covered by the program may need to explore other relief options.
AEP Will Replace First Time Abate
For many years, First Time Abate has allowed taxpayers with a clean compliance history to request the removal of certain failure-to-file, failure-to-pay, and failure-to-deposit penalties.
The IRS will begin phasing out First Time Abate during summer 2026.
AEP is expected to fully replace First Time Abate for eligible returns with original due dates on or after January 1, 2027.
The primary difference is how relief is provided:
Under First Time Abate
A taxpayer or tax professional usually must contact the IRS and formally request relief.
Under AEP
The IRS will review eligibility and apply relief automatically during return processing.
The change is intended to reduce administrative work, improve consistency, and make penalty relief more accessible to taxpayers who may not know that relief is available.
What Happens During the Transition?
Although the IRS is beginning the transition in summer 2026, implementation may not happen all at once.
Some taxpayers who appear to qualify for relief may still receive penalty notices for eligible 2025 tax-year returns or 2026 quarterly returns during the transition period.
Taxpayers should not assume that every penalty notice is correct or that relief has already been considered.
Someone who receives a notice during the transition should:
Review the notice carefully.
Confirm the filing and payment history for the previous three years or 12 quarters.
Determine whether the return and penalty are eligible.
Contact the IRS or work with a tax professional if First Time Abate may still be available.
Respond by any deadline shown on the notice.
Ignoring an IRS notice may result in additional collection activity, interest, or the loss of appeal rights.
What If You Do Not Qualify for AEP?
Taxpayers who do not qualify for automatic relief may still be able to request relief based on reasonable cause.
Reasonable cause relief may be available when a taxpayer exercised ordinary business care and prudence but was unable to file, pay, or deposit taxes on time because of circumstances beyond their control.
Depending on the situation, the IRS may consider factors such as:
Serious illness or incapacity
Death in the taxpayer’s immediate family
Fire, casualty, or natural disaster
Inability to obtain necessary tax records
Reliance on incorrect professional advice in certain circumstances
Other events that prevented timely compliance despite reasonable efforts
Reasonable cause is evaluated based on the specific facts and circumstances. Approval is not automatic, and taxpayers may need to provide a written explanation and supporting documentation.
What This Means for Individuals and Businesses
Automatic penalty relief may reduce the time, expense, and confusion involved in resolving certain IRS penalties.
However, AEP should not be treated as an extension of a tax deadline or permission to file or pay late.
Taxpayers should continue to:
File returns by the applicable deadline
Request an extension when additional filing time is needed
Pay as much tax as possible by the original payment deadline
Make required payroll tax deposits on time
Maintain accurate filing and payment records
Review all IRS notices promptly
A clean compliance history may now provide an additional layer of protection when an isolated mistake occurs. Repeated late filings or payments, however, may affect eligibility for future automatic relief.
How Virtual CPAs Can Help
The new AEP process may make certain penalty relief easier, but determining whether a taxpayer qualifies can still involve reviewing several years of tax filings, payments, deposits, notices, and account transcripts.
Virtual CPAs can help individuals and businesses:
Review IRS penalty notices
Evaluate eligibility for automatic penalty relief
Examine prior filing and payment history
Request First Time Abate during the transition period
Prepare reasonable cause penalty relief requests
Address unpaid tax balances and payment options
Improve tax filing and payroll compliance procedures
Receiving an IRS penalty notice does not always mean the penalty is final. Before paying or responding, it is important to understand the type of penalty involved and whether relief may be available.
Learn how our team can help you navigate IRS notices, penalty relief, and ongoing tax compliance.
This article is for general informational purposes only and does not constitute tax, legal, or accounting advice. Eligibility for IRS penalty relief depends on the taxpayer’s individual facts and circumstances.