IRS automatic penalty relief is rolling out for eligible taxpayers

The IRS is phasing in a new automatic penalty-relief program for taxpayers with strong filing and payment histories. But during the transition, people who receive an IRS notice assessing a penalty should not assume the matter is resolved.

The Automatic Exemption from Penalty, or AEP, was announced July 8, 2026, and began phasing in during summer 2026. For eligible original returns, it is intended to replace First Time Abate for returns with original due dates on or after January 1, 2027.

How the new process works

AEP can prevent certain penalties from being assessed while an eligible original return is processed. Generally, the taxpayer must have timely filed the same type of return and paid any tax due during the prior three years. For quarterly filers, the standard is generally 12 consecutive quarters.

The IRS lists Forms 1040, 1065, 1120, 1120-S, 940, 941, 943, 944, 945 and CT-1 among the return series eligible for AEP consideration, subject to program limits. An eligible return generally must be filed within three years of its original due date.

AEP may prevent failure-to-file and failure-to-pay penalties. For applicable business returns, it may also prevent failure-to-deposit penalties. Business taxpayers face additional requirements, including limits related to prior failure-to-deposit relief and electronic-payment-system avoidance.

When AEP applies, the IRS sends a separate notice explaining that the penalty was not assessed because of the taxpayer’s compliance history. A taxpayer who receives that confirmation generally does not need to contact the IRS or respond to it.

Why some taxpayers may still get penalty notices

The transition from First Time Abate is not immediate for every return. AEP consideration begins with eligible 2025 tax-year returns and 2026 quarterly returns, but the IRS says some of those returns may have been processed before AEP became available. Those taxpayers may still receive a notice assessing a penalty.

First Time Abate may still be available for eligible returns during the transition, including qualifying 2025 tax-year returns processed before AEP started and qualifying 2026 quarterly returns processed before the phase-in. Unlike AEP, First Time Abate is not automatic: the taxpayer must contact the IRS and request it. Reasonable-cause relief may also be available when the facts support it.

The Taxpayer Advocate Service says taxpayers should not ignore a notice assessing a failure-to-file, failure-to-pay or failure-to-deposit penalty when no separate AEP confirmation notice was received. Review the tax period, penalty type and filing and payment history before deciding what to do.

What AEP does not cover

AEP is not a broad tax amnesty and does not eliminate the duty to file, pay or make deposits on time. It generally does not cover daily delinquency penalties, accuracy-related penalties, information-return penalties or returns filed only for infrequent events, such as Forms 706 and 709.

Taxpayers remain responsible for the underlying tax, interest and any penalties that are not eligible for AEP. Interest on unpaid tax remains due. If an eligible penalty is removed, the IRS says it will automatically reduce or remove interest tied specifically to that penalty.

Form CT-1, the Employer’s Annual Railroad Retirement Tax Return, is listed as eligible for AEP consideration, but the IRS procedural guidance says it is not programmed for systemic application when the original return posts. Affected taxpayers may need to contact the IRS for manual consideration.

What taxpayers should do now

• Keep the IRS notice and check whether it says AEP was applied.
• If the IRS assessed a covered penalty and there is no separate AEP confirmation, review the tax period, penalty type and compliance history.
• Call the toll-free number on the notice and ask about AEP eligibility, First Time Abate or reasonable-cause relief.
• Have the notice, return, payment records and filing history available when contacting the IRS.
• Continue paying the underlying tax and interest, even if a penalty is removed.
• Business taxpayers should check the additional rules for failure-to-deposit penalties.

The key distinction is simple: an AEP confirmation notice generally requires no response, but a notice that assesses a penalty still requires review. The IRS says AEP will become the standard automatic process for eligible original returns with due dates beginning January 1, 2027.

Sources

• IRS administrative penalty relief guidance
• Taxpayer Advocate Service transition guidance

Look for updates to this story

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