IRS Replaces First Time Abate with New Automatic Penalty Exemption Program
(Parker Tax Publishing July 2026)
The IRS announced Automatic Exemption from Penalty (AEP), a new automatic process to provide relief from penalties for failure to file, failure to pay, and failure to deposit for taxpayers with a history of filing and paying on time. The AEP program, which applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, will replace the long-standing First Time Abate administrative relief program and is designed to simplify the process and reduce the burden for those with a timely compliance history. IR-2026-83 (7/8/26); IRS Website - Administrative Penalty Relief.
On July 8, the IRS announced Automatic Exemption from Penalty (AEP), a systemic administrative relief program expected to begin this summer. AEP will replace the current administrative penalty relief program, First Time Abate (FTA), which will be phased out during the summer of 2026.
Under AEP, a taxpayer who files or pays late in the current year, but has timely filed returns and paid tax due for the three prior years (or 12 consecutive quarters for quarterly filers), will not be assessed a penalty. The following return series are eligible for AEP consideration:
Forms 1040, 1065, 1120;
Forms 940, 941, 943, 944, 945; and
Form CT-1.
AEP relief applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, as well as future tax periods.
Taxpayers who receive AEP relief will receive a letter explaining that, even though they filed late, paid the tax late, or did not make a deposit timely, the applicable penalties were not assessed due to the taxpayer's history of timely compliance. The IRS states that taxpayers who receive a notice showing an assessed penalty but believe they should have qualified for AEP should contact the IRS.
How AEP Works
AEP is applied when a taxpayer's original return completes processing. If the taxpayer files an eligible, original return late, or pays the tax late, and IRS records show a history of timely compliance over the prior three years (or 12 consecutive quarters):
The IRS won't assess penalties for failure to file, failure to pay, or failure to make a deposit;
The IRS will send the taxpayer a notice explaining AEP relief was applied; and
The taxpayer will not need to contact the IRS or respond to the notice.
Penalties Eligible for Relief
The following penalties are eligible for relief, regardless of amount, under FTA or the new AEP:
Failure to file tax returns (Code Sec. 6651(a)(1));
Failure to file partnership returns (Code Sec. 6698(a)(1));
Failure to file S corporation returns (Code Sec. 6699(a)(1));
Failure to pay the tax shown on a return by the due date (Code Sec. 6651(a)(2);
Failure to pay when the tax is required to be shown on a return, but was not, and that tax was not paid by the date stated in the notice or demand for payment (Code Sec. 6651(a)(3)); and
Failure to deposit taxes in the correct amount, within the prescribed time period, and/or in the required manner (Code Sec. 6656).
If any penalties are reduced or removed, the IRS will also automatically reduce or remove the interest related to the penalty.
How to Qualify for the Relief
In order to qualify for AEP, taxpayers must have a timely compliance history. This means:
The same return type as the original return was timely filed for the prior three years (or 12 consecutive quarters);
Either no penalty (except the estimated tax penalty) was assessed, or a penalty was assessed but later abated for reasonable cause or IRS error; and
The taxpayer meets additional criteria (see below) for business returns.
Additional Requirements for Business Taxpayers
For business taxpayers, the following additional requirements apply:
The IRS did not waive the failure to deposit penalty four or more times during the prior three years (or 12 consecutive quarters), and
The failure to deposit penalty was not charged for Electronic Federal Tax Payment System (EFTPS) avoidance.
Taxpayers that do not qualify for AEP relief may request penalty relief based on reasonable cause and acting in good faith under Code Sec. 6664(c).
Not Eligible for Relief
AEP does not apply for:
Returns filed once or infrequently (i.e., event-based filing requirements);
The daily delinquency penalty under Code Sec. 6652; or
Information reporting dependent on another filing.
For a discussion of the abatement of penalties for reasonable cause and acting in good faith, see Parker Tax ¶262,127.
Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
|
