Taxpayers who occasionally miss a filing, payment, or deposit deadline may soon have an easier path to penalty relief. The IRS has introduced a new Automatic Exemption from Penalty (AEP) program designed to provide certain relief automatically to eligible taxpayers with a strong history of filing and paying on time.
The new process marks a significant change from the IRS's long-standing First Time Abatement (FTA) program. Rather than requiring taxpayers to call or write the IRS to request relief, AEP will generally determine eligibility during return processing and prevent certain penalties from being assessed in the first place.
How Automatic Penalty Relief Works
AEP applies to eligible original returns beginning with 2025 tax-year returns and 2026 quarterly returns, as well as future periods. To qualify, taxpayers generally must have a history of timely filing and payment for the prior three years, or 12 consecutive quarters for quarterly filers.
When the requirements are met, AEP may provide automatic relief from:
- Failure-to-file penalties
- Failure-to-pay penalties
- Failure-to-deposit penalties
No separate application or request is generally required. If the taxpayer qualifies, the IRS will apply the relief during return processing and issue a notice explaining that the applicable penalty was not assessed.
What Happens to First Time Abatement?
The IRS is phasing out First Time Abatement as AEP is implemented. During the transition, however, some taxpayers who qualify for relief may still receive penalty notices for eligible 2025 tax-year returns or 2026 quarterly returns. In those situations, taxpayers who believe they qualify may still need to contact the IRS and request First Time Abatement.
For eligible returns with original due dates on or after January 1, 2027, AEP will replace First Time Abatement.
Not Every Penalty Qualifies for AEP
AEP does not apply to every taxpayer, return, or IRS penalty. Certain information returns and returns associated with less frequent events, such as estate and gift tax returns, generally fall outside the program. Other penalties, including accuracy-related and certain information reporting penalties, may also remain ineligible for automatic relief.
Taxpayers are still responsible for the underlying tax and any applicable interest, along with penalties that do not qualify for AEP. Those who are not eligible for automatic relief may still have options, including requesting penalty relief based on reasonable cause when the circumstances support it.
Why Reviewing IRS Notices Still Matters
Although AEP is intended to simplify penalty relief, taxpayers should not assume every penalty notice is correct or that available relief has been applied. This may be especially important during the transition from First Time Abatement to the new automatic process.
Carefully reviewing IRS correspondence can help determine whether AEP was applied, whether First Time Abatement may still be available during the transition, or whether another form of penalty relief should be considered.
Planning Ahead
The new AEP program should make penalty relief simpler for taxpayers with a strong compliance history, but it does not replace the importance of filing, paying, and making required deposits on time. If you receive an IRS penalty notice or have questions about whether you may qualify for automatic or other penalty relief, contact your ShindelRock team for assistance.
Written by: ShindelRock
