IRS Introduces Automatic Penalty Relief Program for Eligible Taxpayers

By: Edith Miranda | August 3, 2026

The Internal Revenue Service (IRS) has announced a major change to its administrative penalty relief procedures that will make it easier for eligible taxpayers to avoid certain penalties. Beginning in summer 2026, the IRS will implement a new Automatic Exemption from Penalty (AEP) program that will automatically grant penalty relief to qualifying taxpayers with a strong history of tax compliance.

This new initiative is being phased in as a replacement for the long-standing First Time Abate (FTA) program and eliminates the need for many taxpayers to request penalty relief manually.

What Is the Automatic Exemption from Penalty (AEP)?

Under the new AEP program, the IRS will automatically determine whether a taxpayer qualifies for administrative penalty relief when processing an eligible return. If the taxpayer meets the eligibility requirements, the IRS will not assess certain penalties and will issue a notice confirming that relief has been granted.

The objective is to reduce administrative burden, improve consistency, and recognize taxpayers who have demonstrated a history of timely filing and payment.

Who Is Eligible?

Taxpayers may qualify for AEP if they meet the applicable eligibility requirements, including a history of timely filing the same type of return and paying any tax due during the prior three tax years, or the prior 12 consecutive quarters for quarterly filers. Eligibility generally requires:

• Timely filing of the applicable return during the lookback period.
• Timely payment of any tax due during the lookback period.
• Satisfaction of any additional AEP requirements that apply to the taxpayer or return type.

Unlike the previous First Time Abate process, eligible taxpayers do not need to contact the IRS or submit a separate request.

Which Penalties Are Covered?

The Automatic Exemption from Penalty applies to the following penalties:

• Failure to File
• Failure to Pay
• Failure to Deposit

The program applies to eligible original returns beginning with tax year 2025 and quarterly returns beginning in 2026, as well as future filing periods.

According to current IRS guidance, return series eligible for AEP consideration include Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1.

AEP does not apply to all types of penalties. Example of penalties outside the program include Daily Delinquency penalties, accuracy-related penalties, information return penalties, and other penalties not covered b AEP.

Which Returns Are Not Eligible?

Certain returns are generally excluded from the AEP program, including:

• Information returns.
• Returns filed only for specific transactions or infrequent events, such as:
  • Form 706, United States Estate (and Generation Skipping Transfer) Tax Return.
  • Form 709, United States Gift (and Generation Skipping Transfer) Tax Return.

Taxpayers should consult their tax advisor if they are uncertain whether a particular filing qualifies.

Transition from First Time Abate

For many years, taxpayers have relied on the First Time Abate program to request administrative relief from certain penalties. During the transition period beginning in summer 2026, some taxpayers may still receive penalty notices for eligible tax year 2025 returns and 2026 quarterly returns.

If that occurs, taxpayers who believe they qualify may still request First Time Abate.

Beginning with returns that have original due dates on or after January 1, 2027, the Automatic Exemption from Penalty will replace First Time Abate for eligible returns.

What If You Do Not Qualify?

Taxpayers who are not eligible for AEP may still request penalty relief based on reasonable cause. The IRS will continue evaluating these requests under its existing procedures.

It is important to remember that AEP only eliminates eligible penalties. Taxpayers remain responsible for paying:

• Any tax due.
• Applicable interest.
• Penalties that are not eligible for automatic relief.

What This Means for Taxpayers

The new AEP program represents a significant modernization of the IRS penalty relief process. By automatically applying relief when eligibiliyu requirements are met, the IRS is reducing unnecessary administrative steps while recognizing taxpayers with a history of timely compliance.

Individuals and businesses that regularly file returns and pay taxes on time may benefit from this streamlined approach without having to submit separate requests for relief.

Need assistance with an IRS penalty notice?

If you have received an IRS penalty notice or would like to discuss how these changes may affect you or your business, please contact the experienced tax professionals at Chugh CPAs LLP.