On July 8, 2026, the agency announced its Automatic Exemption from Penalty program, or AEP. For eligible taxpayers, the IRS will prevent certain penalties during original return processing without requiring a separate request. First Time Abate, the existing request-based program, remains available for some earlier and transition-period returns.

What is changing

AEP is an IRS administrative program, not a new statutory tax exemption or a blanket waiver of penalties. It is designed for taxpayers who generally complied with their filing, payment and deposit obligations but have a one-time problem.

When a taxpayer qualifies, the IRS applies AEP automatically during original return processing. No application or separate request is required, and the agency says it will send a notice confirming that the penalty was not assessed because of the taxpayer’s timely compliance history.

Eligibility generally requires the same type of return to have been filed on time during the three prior years, with tax due paid on time. For quarterly returns, the relevant history is generally 12 consecutive quarters. Other conditions can apply, especially for business taxpayers.

The key date is Jan. 1, 2027

For eligible original returns with due dates on or after Jan. 1, 2027, AEP is expected to replace First Time Abate. The cutoff is based on the return’s original due date, not simply the date the IRS finishes processing it.

The IRS began phasing in AEP during summer 2026. The agency’s guidance says AEP consideration begins with eligible 2025 tax-year returns and 2026 quarterly returns, but some of those returns may still have been processed before the automated system was available.

Which returns may still require a request

First Time Abate remains available by request for eligible 2024 tax-year returns and eligible 2025 quarterly returns. It may also remain available for eligible 2025 tax-year returns and eligible 2026 quarterly returns that were processed before AEP began.

For those returns, First Time Abate will not be applied automatically. If a qualifying return receives a penalty notice and the taxpayer does not receive a separate notice saying AEP was applied, the taxpayer should contact the IRS and ask whether First Time Abate or another form of relief is available.

What AEP can cover

For eligible individuals, AEP can prevent failure-to-file and failure-to-pay penalties. For eligible business taxpayers, it can also cover failure-to-deposit penalties.

The IRS says AEP generally applies to certain recurring return series, including Forms 1040, 1065, 1120, 940, 941, 943, 944, 945 and CT-1. Event-based or infrequently filed returns, such as estate and gift tax returns, generally are not eligible.

AEP does not cover every penalty. IRS guidance excludes daily delinquency penalties, accuracy-related penalties, information-reporting penalties and other penalties outside the program. Business taxpayers also face additional conditions for failure-to-deposit relief, including limits related to prior penalty waivers and electronic-payment-system avoidance.

AEP does not erase the underlying tax or interest. Taxpayers remain responsible for filing, paying and making required deposits on time, as well as paying penalties that fall outside the program.

Why the change matters

The National Taxpayer Advocate says the old process left some eligible taxpayers without relief because they did not know to ask, could not reach the IRS or could not afford professional help. The advocate says that burden was especially significant for low-income taxpayers and people without access to a tax professional.

In fiscal year 2025, nearly 220,000 taxpayers received First Time Abate relief through the manual process. The Taxpayer Advocate Service estimates that more than 1.5 million taxpayers would have received relief if AEP had been in place during that same period. That is an estimate based on fiscal year 2025 data, not a guarantee of future recipients.

The National Taxpayer Advocate has also urged the IRS to preserve reasonable-cause relief when a taxpayer’s circumstances support it, rather than using an administrative waiver in a way that could affect eligibility for future AEP relief. That issue remains part of the implementation debate.

What taxpayers should do now

• Keep filing, paying and making required deposits by the deadline. AEP is limited relief, not permission to file or pay late.
• Check the return’s tax year, return type, original due date and processing timing before assuming relief will be automatic.
• If an eligible transition-period return receives a penalty notice, call the IRS using the number on the notice and ask whether First Time Abate applies.
• Keep the notice and records showing your filing and payment history available.
• If neither AEP nor First Time Abate applies, reasonable-cause relief may still be available depending on the facts.

The practical rule is simple: eligible original returns with due dates on or after Jan. 1, 2027, are expected to move to automatic relief. Earlier and transition-period returns may still require taxpayers to contact the IRS.

Sources

• IRS: Automatic Exemption from Penalty — What taxpayers should know
• National Taxpayer Advocate: The IRS implements automatic penalty relief

The Advocate warns that missing the deadline can permanently block relief, even if the Kwong v. United States decision is ultimately upheld. In other words: if your situation falls within the Kwong framework, timing your claim may be as important as the underlying dispute.

What the July 10, 2026 cutoff is

The Advocate explains that, in most cases, taxpayers must file a claim for credit or refund within the later of three years from when they filed their return, or two years from when they paid the tax, penalty, or interest. But if, under the Kwong reasoning, affected returns or payments are treated as due on July 10, 2023, then July 10, 2026 becomes a critical deadline for many refund or protective claims.

The Advocate also stresses that relief is not automatic: many taxpayers may need to file a refund claim, amended return, original return, abatement request, or a protective claim to preserve their rights.

Who may be affected at the household level

According to the Taxpayer Advocate’s guidance, the potentially relevant group may include taxpayers who:

• Filed a return during the COVID-19 disaster relief postponement period and were assessed penalties or interest related to that return;
• Paid, or still owe, penalties or interest for filing or paying late during that period;
• Filed late international information returns; or
• Believe they may have missed other refund opportunities or refundable benefits for tax years affected by the COVID postponement period.

If Kwong-related reasoning ultimately applies to a particular taxpayer’s facts and the appropriate, timely claim is filed, relief described by the Advocate could include refunds or abatements of penalties and interest assessed for late filings or payments during the roughly 3.5-year COVID-19 period the court addressed. The Advocate also describes a potential spillover to some taxpayers who missed refund opportunities for tax years 2019 through 2022.

How to protect your rights (refund vs. protective claim)

The Advocate says taxpayers may need to take proactive steps depending on whether they need to change the underlying tax liability or just preserve the dispute while the law is unsettled.

For Kwong-related penalty and interest claims, the Advocate generally points taxpayers to Form 843, Claim for Refund and Request for Abatement. If a taxpayer needs to change income, deductions, credits, filing status, or other items that affect tax liability, the Advocate says they generally should file an original or amended return instead of using Form 843.

For some taxpayers with an IRS Online Account, the Advocate notes an online option to submit Form 843 electronically for claims related to fully paid interest and penalties. If filing by mail, the Advocate instructs taxpayers to label the Form 843 as related to Kwong v. United States.

A protective claim is also an option when the law is unsettled, and the Advocate says it can help preserve refund rights while awaiting final resolution.

What’s still uncertain

Even with a hard deadline, there is uncertainty about how relief will be delivered in practice. The Taxpayer Advocate Service report says the IRS may receive a significant volume of Kwong-related claims and that standardized processing steps have not yet been established.

The report also describes operational friction: many Form 843 submissions may be handled on paper and processed manually, potentially creating delays. It also notes taxpayers may not receive reliable online tracking after submitting paper claims, which could make it harder to time follow-up actions for household budgeting purposes.

What to do before July 10, 2026

• Review your COVID-19-era filing and payment timeline and identify any penalties or interest the IRS assessed during the postponement period.
• Compare your records to the Taxpayer Advocate’s description of potentially eligible situations under the Kwong framework.
• If you may need a claim to preserve rights, plan to submit it by July 10, 2026 and follow the Advocate’s Form 843 and labeling instructions.

For the most accurate steps, rely on the IRS and Taxpayer Advocate materials tied to the Kwong deadline and Form 843 requirements.

Sources

• IRS Newsroom: National Taxpayer Advocate issues 2026 mid-year report to Congress (introducing TAS priorities, including Kwong-related taxpayer-rights protection)
• National Taxpayer Advocate blog: “Act on or before July 10, 2026 to protect potential COVID-19 disaster relief refund claims”