For years, one of the more frustrating aspects of IRS penalty administration was that many taxpayers who clearly qualified for relief never received it—not because they were ineligible, but because they didn’t know to ask.
That is finally changing.
On July 8, 2026, the IRS announced a significant modernization of its administrative penalty relief procedures. The agency is replacing the long-standing First Time Abate (FTA) process with a new Automatic Exemption from Penalty (AEP) program that will automatically grant relief to many eligible taxpayers without requiring them to file a request or call the IRS.
For taxpayers—and the professionals who advise them—this is one of the most practical taxpayer-service improvements the IRS has made in years.
The Old System: Relief Was Available—If You Knew About It
For many years, the IRS has maintained an administrative policy allowing taxpayers with a strong compliance history to obtain relief from certain penalties after an isolated mistake.
The problem was not the eligibility rules. The problem was the process.
Generally, a taxpayer first had to receive the penalty notice, then know that First Time Abate existed, then contact the IRS and request relief. Taxpayers represented by experienced tax professionals often obtained the relief routinely. Many unrepresented taxpayers never did.
The National Taxpayer Advocate has repeatedly criticized this system because relief often depended less on eligibility than on whether a taxpayer knew the right words to say or could successfully reach the IRS by telephone.
What Is Changing?
Beginning with the phased rollout in summer 2026, the IRS will begin automatically determining whether taxpayers qualify for penalty relief during original return processing.
If the taxpayer qualifies, the IRS simply will not assess the covered penalties. No request is required. Eligible taxpayers will instead receive a notice informing them that the relief has already been granted because of their prior compliance history. No response to that notice is needed.
In other words, the IRS is moving from a “request it if you know about it” model to an “apply it automatically” model.
Which Penalties Are Covered?
The Automatic Exemption from Penalty generally applies to the three penalties that historically qualified for First Time Abate:
- Failure-to-file penalties
- Failure-to-pay penalties
- Failure-to-deposit penalties
The main return series currently eligible for AEP consideration include Forms 1040, 1065, and 1120; employment tax returns (Forms 940, 941, 943, 944, and 945); and Form CT-1.
Importantly, this is not forgiveness of the tax itself. Taxpayers remain responsible for:
- the underlying tax,
- any applicable interest, and
- penalties that are outside the scope of the program (such as accuracy-related penalties, estimated tax penalties, information-return penalties, and the daily delinquency penalty).
Who Qualifies?
The eligibility standards are largely familiar.
Generally, taxpayers must have demonstrated a clean compliance history during the preceding three years (or twelve consecutive quarters for quarterly filers). This includes timely filing of the same type of return and timely payment of any tax due. In most cases, either no covered penalty was assessed in the look-back period, or any assessed penalty was later abated for reasonable cause or IRS error.
Although the mechanics are changing, the underlying concept has not: Taxpayers who have historically complied with the tax laws should not be penalized because of one isolated mistake.
Not Every Return Is Eligible
One important limitation deserves attention.
The IRS has stated that certain specialized returns generally are not eligible for Automatic Exemption from Penalty. Examples include:
- Form 706 (U.S. Estate Tax Return)
- Form 709 (U.S. Gift Tax Return)
- many information returns
- certain other returns associated with infrequent or specialized transactions
This is particularly relevant for estate planning practitioners. Clients filing estate tax or gift tax returns should not assume that automatic relief will be available. Traditional requests for penalty abatement—including reasonable cause arguments where appropriate—will continue to play an important role.
The Transition Period
The IRS is implementing the new system gradually.
AEP begins applying during summer 2026 to eligible original 2025 tax-year returns and 2026 quarterly returns (and subsequent periods) once the system is live for those returns. First Time Abate remains available during the transition for taxpayers who receive penalties on returns processed before AEP applies, as well as for earlier periods. Taxpayers in those situations must still contact the IRS and request FTA.
Beginning with eligible returns having original due dates on or after January 1, 2027, Automatic Exemption from Penalty is expected to replace First Time Abate for covered returns.
A Significant Administrative Improvement
The practical significance of this change should not be underestimated.
According to the National Taxpayer Advocate, during fiscal year 2025 approximately 220,000 taxpayers obtained First Time Abate through the traditional request process. TAS estimates that if Automatic Exemption from Penalty had been in place, more than 1.5 million taxpayers would have received penalty relief automatically—roughly seven times as many.
That represents a substantial reduction in unnecessary taxpayer burden while allowing IRS personnel to devote resources to matters requiring individualized review.
A Few Practical Takeaways
Although the new system is welcome, taxpayers and advisors should keep several points in mind:
- Automatic relief applies only if the taxpayer meets the eligibility requirements.
- It does not eliminate the underlying tax or interest.
- Estate tax returns, gift tax returns, and certain other specialized filings generally remain outside the program.
- During the transition period, some qualifying taxpayers may still receive penalty notices on 2025 returns or 2026 quarterly returns that were processed before AEP applied. Those taxpayers should contact the IRS and request First Time Abate if they believe they qualify.
- Traditional reasonable cause relief remains available when the facts support it. Because AEP is an administrative waiver, practitioners should carefully consider whether a reasonable cause request is preferable in a given case. Applying AEP first can consume the administrative relief and potentially affect eligibility in a later year, whereas statutory reasonable cause relief does not.
- Taxpayers who receive a penalty notice should not assume the IRS has already considered every available form of relief. When in doubt, contact the IRS.
Final Thoughts
As tax practitioners, we often spend considerable time requesting relief that everyone involved knows is likely to be granted.
Automating this process is a common-sense improvement. It reduces unnecessary phone calls, correspondence, and administrative expense while promoting more consistent treatment of similarly situated taxpayers.
The IRS deserves credit for making a taxpayer-friendly change that simplifies compliance without changing the substantive eligibility rules.
For taxpayers who generally file and pay on time, making one mistake should no longer require knowing the secret handshake.
This article is intended for general informational purposes only and does not constitute legal or tax advice. Taxpayers should consult their tax advisor regarding their particular circumstances.
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