Automatic Penalty Relief is a new IRS initiative designed to reward taxpayers with a strong compliance history. Rather than requiring eligible taxpayers to request penalty relief after receiving a notice, the IRS intends to apply qualifying relief automatically for certain penalties.
The program is expected to reduce reliance on the long-standing First Time Abate (FTA) process for many taxpayers.
The IRS announced that it expects to begin implementing a new Automatic Exemption from Penalty (AEP) program during summer 2026. For an eligible taxpayer with a strong compliance history, AEP may stop certain late-filing, late-payment, or late-deposit penalties before they are added to the account.
AEP will reduce the need to request First Time Abate, but it does not cancel tax or interest and does not cover every penalty. The most important point during the rollout: do not ignore an IRS notice because relief is supposed to be automatic.
Who Qualifies for Automatic Penalty Relief?
In general, a taxpayer may qualify if they have consistently filed returns and paid taxes on time. The IRS will review filing history, payment history, return type, and other eligibility requirements before automatically granting relief.
AEP may apply when all of the following are true:
- The filing is an eligible original return.
- The same return type was filed on time during the prior three years, or during the prior 12 quarters for quarterly returns.
- The related tax was paid on time during that lookback period.
- No disqualifying penalty was assessed during the lookback period, unless it was later removed for reasonable cause or IRS error.
- Business taxpayers satisfy the additional failure-to-deposit requirements.
- The penalty is for filing late, paying late, or making a late federal tax deposit.
Potentially eligible return series include Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. Information-return penalties, accuracy-related penalties, daily delinquency penalties, and event-based returns such as Forms 706 and 709 generally fall outside AEP.
How Much Could the Relief Be Worth?
| Example Suppose a taxpayer owes $20,000 and files and pays their return three months late. Under a simplified example, the combined failure-to-file and failure-to-pay penalties could total approximately $3,000: $20,000 × 5% × three months. If the taxpayer qualifies for Automatic Penalty Relief, those penalties may never be assessed. However, the taxpayer would still owe: – the original $20,000 tax – any applicable interest |
Actual results may differ because of statutory limits, minimum penalties, payment timing, and overlapping penalties.
The 2026 Transition Rule
AEP is scheduled to cover eligible 2025 tax-year returns, eligible 2026 quarterly returns, and later periods. It is expected to replace First Time Abate for eligible returns originally due on or after January 1, 2027.
Because implementation will occur in stages, an otherwise eligible taxpayer may still receive a penalty notice for a 2025 return or 2026 quarterly filing. Depending on when the return is processed, the IRS may not automatically apply AEP during the transition period. If a penalty is assessed, taxpayers who believe they qualify should consider requesting First Time Abate rather than assuming the IRS will correct the issue automatically.
What to Do If You Receive a Notice
- Review the return type, tax period, penalty, amount, and response deadline.
- Compare the notice with your filing and payment history for the required lookback period.
- Confirm whether both the return and penalty are eligible for AEP.
- Keep filing confirmations, payment records, and federal tax deposit records.
- If AEP was not applied, consider First Time Abate during the rollout or reasonable-cause relief based on your circumstances.
- If the notice says AEP was granted, confirm that the account reflects the expected adjustment.
If you receive an IRS penalty notice, contact our office before responding or paying the penalty. We can review your filing history, determine whether AEP, First Time Abate, or reasonable-cause relief may apply, and help you respond appropriately.
Common Situations We Expect to See
We expect many taxpayers to have questions during the transition period, including:
- “I received a penalty notice even though I’ve never filed late before.”
- “I thought the IRS was removing these penalties automatically.”
- “Should I still request First Time Abate?”
During the rollout, the answer will often depend on when the IRS processed the return and whether the account has been updated for AEP.
Need Help Reviewing an IRS Penalty Notice?
If you’ve received an IRS penalty notice, don’t assume the assessment is correct—or that automatic relief has already been applied.
Our tax professionals can:
- Review your IRS notice
- Determine whether Automatic Penalty Relief applies
- Evaluate First Time Abate eligibility
- Request reasonable cause relief when appropriate
- Help you respond before IRS deadlines expire
Contact Greenwood Ohlund today to schedule a consultation before responding to the IRS.
Frequently Asked Questions
Does AEP eliminate the tax I owe?
No. AEP only applies to certain penalties. Any unpaid tax and applicable interest must still be paid.
Does AEP eliminate interest?
No. AEP does not eliminate interest. Interest continues to accrue on any unpaid tax, even if eligible penalties are removed.
Can I rely on AEP if I file my return late?
No. Continue filing and paying on time whenever possible. Not every return or penalty qualifies, and the IRS may not apply AEP immediately during the rollout.
What if I receive a penalty notice?
Review it promptly. If AEP was not applied, you may still qualify for First Time Abate or other penalty relief.
Which returns are generally eligible?
AEP is expected to apply to many common return series, including Forms 1040, 1065, 1120, and certain employment tax returns. Some penalties and return types, such as Forms 706 and 709, are generally not eligible.
Diem Bui – CPA, EA, MBA, Tax Manager
References
IRS News Release IR-2026-83 (July 8, 2026)
IRS Fact Sheet FS-2026-12 (July 2026)
IRS Administrative Penalty Relief
This article provides general information and is not tax, legal, or accounting advice. Eligibility depends on each taxpayer’s facts and current IRS guidance.
