The IRS has introduced a new process that may make it easier for eligible taxpayers to receive relief from certain penalties.
Under the new system, qualifying taxpayers with a strong history of filing and paying on time may receive automatic penalty relief without having to contact the IRS and formally request it.
The change could reduce unnecessary notices, telephone calls, and administrative work. However, the relief does not apply to every taxpayer, return, or penalty.
What is the Automatic Exemption from Penalty?
The new program is called the Automatic Exemption from Penalty, or AEP.
Previously, many eligible taxpayers had to contact the IRS and request relief under its First Time Abate program. With AEP, the IRS will review a taxpayer’s compliance history while processing an eligible original return.
When the requirements are met, the IRS will not assess certain qualifying penalties. The taxpayer should then receive a notice confirming that automatic penalty relief was applied.
The program is expected to begin during summer 2026 and will initially apply to eligible 2025 tax-year returns and 2026 quarterly returns, as well as future qualifying tax periods.
Who may qualify for automatic penalty relief?
Eligibility generally depends on whether the taxpayer has a history of timely compliance for the same type of return.
For annual returns, the IRS will generally review the previous three years. For quarterly returns, it will review the previous 12 consecutive quarters.
The IRS says eligible return series include:
- Forms 1040, 1065, and 1120
- Forms 940, 941, 943, 944, and 945
- Form CT-1
Additional requirements may apply to businesses, particularly when the issue involves federal tax deposits.
Not every return qualifies. Information returns and returns filed only for occasional or specific events are generally excluded. Examples may include estate and gift tax returns.
Because eligibility depends on the return type and the taxpayer’s IRS account history, you should not assume that a penalty will automatically be removed.
Which penalties may qualify?
The new automatic penalty relief process may apply to three common penalties:
- Failure-to-file penalties
- Failure-to-pay penalties
- Failure-to-deposit penalties
One important difference is that AEP is intended to prevent an eligible penalty from being assessed in the first place.
Under the older First Time Abate process, the penalty was often assessed first and removed only after the taxpayer requested relief.
What happens to First Time Abate?
The IRS will begin phasing out First Time Abate as the new automatic process is introduced.
During the transition, some taxpayers may still receive penalty notices for eligible 2025 tax-year returns or 2026 quarterly returns. A taxpayer who believes they qualify may still need to contact the IRS and request First Time Abate.
For eligible returns with original due dates on or after January 1, 2027, AEP is expected to replace First Time Abate.
This transition period may create some confusion, especially when a penalty notice arrives before the new automatic process has been fully applied.
Penalty relief does not eliminate the underlying tax
Automatic penalty relief does not mean that the entire tax balance disappears.
Taxpayers remain responsible for:
- Any unpaid tax
- Interest charged on the unpaid tax
- Penalties that are not covered by AEP
If an eligible penalty is removed or prevented, the IRS will generally reduce or remove the interest associated with that penalty. Interest on the underlying unpaid tax may continue to accrue.
What if you do not qualify?
Taxpayers who do not qualify for AEP may still be able to request relief based on reasonable cause.
Reasonable cause relief is considered individually and depends on the facts and circumstances. Events such as serious illness, natural disasters, unavailable records, or certain system problems may be relevant.
Simply lacking the funds to pay is generally not enough on its own to establish reasonable cause. However, other surrounding circumstances may still matter.
Do not ignore an IRS penalty notice
The new automatic process does not make IRS notices less important.
If you receive a penalty notice, review the return type, tax period, penalty, and amount carefully. A notice may have been issued during the transition, or the IRS may not have had all the information needed to determine eligibility.
Before paying the penalty or responding on your own, consider having the notice professionally reviewed.
You can read more in the IRS guidance on administrative penalty relief.
Need help reviewing an IRS penalty?
Automatic penalty relief may simplify the process for some taxpayers, but determining whether the IRS applied the rules correctly may still require a closer review.
Torkelson & Associates CPAs can help you understand an IRS notice, review your compliance history, and determine whether penalty relief may be available.
Contact Torkelson & Associates CPAs for assistance with an IRS penalty or penalty-relief request.