Legacy Law Blog

On July 8, the IRS announced a new automatic penalty relief program for taxpayers with a history of timely filing and payment.

The new Automatic Exemption from Penalty (AEP), is designed to replace the long-standing First Time Abate (FTA) process for eligible returns and reduce the need for taxpayers to request relief manually. This new automatic process is a quiet but important shift that will change how many everyday penalty issues are resolved.

Background: From “First Time Abate” to Automatic Relief

For years, taxpayers with a clean compliance history could request relief from certain penalties under the FTA policy, but that relief was never automatic. Taxpayers, or their representatives, had to contact the IRS, wait on hold, or send written requests, then track follow-up notices to confirm that the penalties were actually removed.

In its July 8 news release, the IRS announced that it is now building penalty relief directly into return processing for eligible taxpayers. Instead of requiring a separate abatement request, the system will automatically apply relief when the taxpayer meets the criteria.

How the New Automatic Exemption from Penalty Works

The new AEP framework is designed to prevent penalties from being assessed at the time the IRS processes an eligible original return. The focus is on the same core penalties that commonly arise when clients miss deadlines or underpay during the first year that a new tax balance occurs. This includes failure-to-file, failure-to-pay and failure-to-deposit penalties.

Under AEP, taxpayers generally qualify for automatic relief if they have a strong recent record of timely filing and payment. To qualify for AEP, the IRS will review the prior three-year history for annual returns and a comparable 12-quarter history for quarterly filers, to determine whether a taxpayer has filed the required returns on time and paid any tax due.

If the taxpayer meets these criteria, the penalties will not be assessed during processing. Taxpayers do not need to take action to receive this relief. If eligible, the IRS will apply AEP and issue a notice confirming that the relief was granted.

Which Returns and Taxpayers are Covered

The rollout of the new AEP program will begin with returns for tax year 2025 and 2026 quarterly returns, with the IRS signaling that this automatic process will become the standard approach for future periods. In other words, the default for many compliant taxpayers will shift from “penalized unless you ask for relief” to “relief applied automatically if you qualify.”

There are important exclusions. Certain returns tied to infrequent or special transactions, such as estate and gift tax returns (Forms 706 and 709), will not be eligible for AEP. Information returns and other categories of filings that historically involve different penalty structures are also outside the scope of this automatic relief.

Transition Issues and What to Expect

Because the IRS is implementing AEP alongside its existing systems, there will be a transition period where eligible taxpayers may still receive penalty notices that look familiar but behave differently. A taxpayer might receive an initial notice reflecting an assessed penalty that is then removed automatically after processing without the taxpayer needing to call or write in.

Tax professionals should be prepared to explain to clients that some 2025 and 2026 notices may not require a traditional “penalty abatement campaign.” In many cases, the appropriate first step will be to verify whether the IRS has already applied automatic relief or is scheduled to do so, rather than immediately drafting a reasonable-cause request.

During the transition period, some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns. Taxpayers who believe they qualify may contact the IRS to request an FTA. Taxpayers should not assume that because the IRS did not automatically apply AEP to their penalties that they do not qualify for relief.

Impact on First Time Abate and Reasonable Cause Penalty Abatement

The AEP is not a complete replacement for penalty relief, but it does materially change how routine FTA abatement cases will be applied for qualified taxpayers. Over time, the IRS intends for AEP to take over the role that FTAs have played for eligible original returns with due dates on or after Jan. 1, 2027. Once that transition is complete, FTA as we’ve known it will largely be retired for any new tax periods.

Reasonable-cause penalty abatement remains available, and the process will be unchanged from how it exists today. Taxpayers who do not qualify for AEP, or whose penalties fall outside the program’s scope, can still pursue abatement based on facts such as serious illness, natural disasters or other circumstances that prevented timely compliance. Those requests will continue to require a separate explanation and supporting documentation.

It is important to note that while AEP prevents the assessment of certain penalties, taxpayers must still pay any tax and interest due, as well as any penalties not eligible for relief.

Supporting Fairness and Voluntary Compliance

The IRS is making this change to promote fairness and consistency in the application of penalty relief while encouraging voluntary compliance. By automatically recognizing taxpayers with a strong compliance history, AEP reduces taxpayer burden and ensures penalty relief is applied fairly and equitably to all taxpayers. The IRS has noted that this approach observes taxpayers’ rights as outlined by the Taxpayer Advocate Service.

Why this Matters for Taxpayers

For taxpayers with consistent, timely compliance, this change should mean fewer surprise penalties, fewer phone calls to the IRS and less administrative friction to clear first time penalties.

Tax professionals are watching closely to see how the IRS implements AEP, particularly in the first filing seasons it covers. Taxpayers should expect that there will be an adjustment period as the IRS implements this new program. This post will be followed with a second one in the future as more is understood about the AEP, its implementation and how the IRS is applying it to provide relief for eligible taxpayers.