IRS Simplifies Penalty Relief with a New Automatic Process

If you've ever paid a tax penalty and later found out you could have requested relief for it, the IRS just made that process a lot less hands-on for taxpayers with a solid track record.

What's New

The IRS has introduced the Automatic Exemption from Penalty (AEP), a new systemic process that grants penalty relief automatically to eligible taxpayers, without them needing to ask for it. AEP is replacing First Time Abate, which has long been the most common way taxpayers requested relief from certain penalties.

Under the previous system, a taxpayer with an otherwise clean compliance history who missed a deadline still had to reach out to the IRS and formally request relief. AEP removes that extra step for taxpayers who qualify.

Who Qualifies

AEP applies to eligible original returns starting with tax year 2025, and to 2026 quarterly returns and future periods. To qualify, a taxpayer needs a history of filing on time and paying any tax due for the prior three years (or the prior 12 consecutive quarters for quarterly returns).

When someone qualifies, the IRS won't assess penalties during processing for:

• Failure to file

• Failure to pay

• Failure to deposit

Not every return is eligible. Information returns and returns tied to one-time or infrequent events, like estate or gift tax returns, generally don't qualify for AEP.

What Taxpayers Need to Do

Nothing, if you're eligible. If the IRS determines you qualify, the relief is applied automatically, and you'll receive a notice confirming it.

The Transition Period

AEP is rolling out gradually over the summer of 2026, and First Time Abate is being phased out alongside it. During the transition, some taxpayers who would ultimately qualify for AEP may still receive a penalty notice for 2025 or 2026 quarterly returns. If that happens, you can still reach out to the IRS to request First Time Abate while the systems shift over. AEP fully replaces First Time Abate for returns with original due dates on or after January 1, 2027.

It's also worth noting that AEP addresses certain penalties, not the underlying tax bill. Any tax owed, along with interest, is still due regardless of penalty relief.

If You Don't Qualify for AEP

Taxpayers who don't meet the compliance history requirement for AEP can still request penalty relief based on reasonable cause, the same option that's always been available for situations like illness, natural disaster, or other circumstances outside your control.

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Questions About a Penalty Notice?

If you've received a penalty notice and aren't sure whether it should have been covered under this new relief, or you want help requesting reasonable cause relief, we're glad to help you sort through it. Contact us to talk through your specific notice.

HFM CPAs provides specialized accounting, tax, and assurance services to individuals and businesses across Connecticut and Rhode Island.