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IRS introduces automatic penalty relief for taxpayers with a strong compliance history

ARTICLE | August 24, 2026

If you usually file and pay your taxes on time but miss a deadline once, getting penalty relief may soon become much easier.

The IRS is replacing its long-standing First Time Abate program with a new Automatic Exemption from Penalty, or AEP. Under the new system, eligible taxpayers will receive relief automatically. You will no longer need to call the IRS or submit a separate request in many cases.

The change begins with eligible 2025 tax year returns and 2026 quarterly returns. It will apply to future periods as well.

For business owners and individuals with a solid filing history, this could remove one more administrative headache after an occasional late filing or payment.

AEP can prevent certain penalties before they are assessed

First Time Abate generally required you to receive a penalty and then ask the IRS to remove it. AEP changes that process.

If you qualify, the IRS will identify your compliance history when it processes your original return. It will then avoid assessing certain penalties in the first place. You do not need to file an application or make a separate request. The IRS will send you a notice confirming that relief was applied.

AEP may cover three common penalties:

• Failure to file
• Failure to pay
• Failure to deposit

For example, assume your business has filed its payroll tax returns and made its required deposits on time for the past several years. A one-time deposit problem in 2026 could potentially qualify for automatic relief if all AEP requirements are met.

So if you receive an IRS notice after a late filing, payment, or deposit, read it carefully before assuming you owe a penalty. The IRS may have already applied AEP.

Your prior compliance history is the key

The main requirement is a history of timely compliance.

For annual returns, the IRS generally looks at the prior three years. For quarterly returns, it looks at the prior 12 consecutive quarters. The same return type generally must have been filed on time during that period.

The rules also consider your prior penalty history. According to current IRS guidance, you may still qualify if a prior penalty was later removed because of reasonable cause or an IRS error. Estimated tax penalties generally do not count against you for this purpose.

Business taxpayers have additional requirements involving prior failure-to-deposit penalties.

Consider a corporation that files Form 1120 every year. If its 2022, 2023, and 2024 returns were filed timely and it otherwise satisfies the AEP rules, a late eligible 2025 return may qualify for automatic penalty relief.

The practical move is simple: maintain clean filing and payment records. A strong compliance history now has an additional benefit if you make an occasional mistake.

Many common business and individual returns are eligible

Current IRS guidance lists several return series that may qualify for AEP, including:

• Forms 1040, 1065, and 1120
• Forms 940, 941, 943, 944, and 945
• Form CT-1

But AEP does not apply to every return or every penalty. Returns filed only occasionally because of a specific event generally do not qualify. The IRS specifically notes that information returns and certain event-based filings, such as a Form 709 Gift Tax Return, are outside the program.

AEP also does not generally cover penalties such as accuracy-related penalties or daily delinquency penalties.

Before assuming a penalty will disappear automatically, confirm that both the return and the penalty are covered.

First Time Abate is being phased out, not disappearing overnight

The transition creates an important timing issue.

First Time Abate remains available for certain older returns and returns processed before AEP becomes operational. Current IRS guidance says it may still apply to eligible 2024 returns, 2025 quarterly returns, and certain 2025 tax year and 2026 quarterly returns processed before AEP begins. In those cases, you may need to contact the IRS to request relief.

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

That means you should not ignore a penalty notice simply because you think AEP applies. During the transition, the timing of the return and IRS processing may determine whether relief is automatic or whether you still need to request First Time Abate.

If you receive a penalty notice for a 2025 or 2026 period, have your CPA review it before paying it.

Penalty relief does not erase the underlying tax or interest

AEP is penalty relief. It is not forgiveness of the tax itself.

You still owe any unpaid tax. You may also owe interest and any penalties that are not covered by AEP. The IRS also makes clear that taxpayers should continue filing returns, paying taxes, and making required deposits by their normal deadlines.

For example, suppose you owe $40,000 of tax and qualify to have a failure-to-pay penalty prevented under AEP. The $40,000 tax liability does not disappear. Interest on the unpaid tax can still apply.

So treat AEP as a safety net for an occasional compliance problem, not as a reason to delay filing or payment.

Reasonable cause relief is still available

Failing the AEP requirements does not necessarily mean you are out of options.

The IRS continues to allow taxpayers to request penalty relief based on reasonable cause. That relief depends on your facts and circumstances and generally requires showing that you exercised ordinary business care and prudence but were unable to meet the requirement.

A serious illness, casualty, natural disaster, or another circumstance outside your control may support a reasonable cause request depending on the facts.

If you receive a significant penalty and AEP does not apply, gather the records that explain what happened before responding to the IRS.

What this change means for taxpayers

AEP should make routine penalty relief easier for taxpayers who have consistently met their obligations.

But automatic does not mean universal. Eligibility still depends on the return involved, your prior compliance history, the type of penalty, and the timing of the filing.

If you receive an IRS penalty notice, do not assume the amount is final. Review your prior filing and payment history first. You may qualify for AEP, First Time Abate during the transition period, or reasonable cause relief.

Your CPA can also help determine which form of relief applies and whether the IRS processed the penalty correctly. For more personalized guidance regarding IRS penalties and potential relief, please contact our office.