IRS Announces Automatic First-Time Penalty Relief but Penalty Notices Should Not Be Overlooked5 Min Read

A simpler process still requires careful review

Beginning in Summer 2026, the IRS will phase in the Automatic Exemption from Penalty program (AEP). The program will automatically prevent certain failure-to-file, failure-to-pay, and failure-to-deposit penalties from being assessed when an eligible taxpayer has an established history of timely filing and payment.

AEP replaces the First Time Abate (FTA) process for eligible returns with original due dates on or after January 1, 2027. The initial phase-in will include eligible 2025 tax-year returns and 2026 quarterly returns. The AEP will be fully phased in as of January 1, 2027.

The change makes relief easier, but automatic relief does not mean taxpayers should disregard a penalty notice. Not every return qualifies; the transition will occur gradually, and taxpayers may have other forms of relief available depending on the situation.

Eligibility depends on IRS account history

For annually filed returns, taxpayers will generally need a timely compliance history for the previous three years. Quarterly business filers generally must have filed and paid on time for the previous 12 consecutive quarters.

The program covers certain failure-to-file and failure-to-pay penalties, as well as certain failure-to-deposit penalties for businesses. Eligible returns include Forms 1040, 1065, 1120, 940, 941, 943, 944, 945 and CT-1.

Eligibility is determined separately for each return type and is based on IRS records. An unprocessed return, misapplied payment, or unresolved notice could affect whether the IRS recognizes a taxpayer as eligible.

Taxpayers should retain filing confirmations, electronic payment records, payroll deposit documentation, and correspondence resolving prior penalties.

Automatic relief may not be the best option

Some taxpayers eligible for AEP may also qualify for reasonable-cause relief.

Reasonable cause is based on the circumstances surrounding a specific failure, such as a serious illness, natural disaster, system disruption, or another event that prevented compliance despite the taxpayer exercising ordinary business care and prudence.

It is critical to understand reasonable-cause relief to preserve AEP potential if other options exist. If the IRS automatically applies AEP in a year when reasonable cause was available, the taxpayer may lose the opportunity to use AEP for a later mistake when reasonable cause would not apply.

Taxpayers should preserve documentation supporting reasonable cause even when an AEP waiver is expected. Automatic relief may resolve the immediate penalty, but it may not be the most valuable option over the long term.

Penalty notices still require attention

Taxpayers may continue receiving penalty notices during the transition, particularly for eligible 2025 returns and 2026 quarterly filings processed before AEP is fully operational.

When a notice arrives, taxpayers should confirm:

• The return and tax period involved.
• Whether the penalty relates to filing, payment, or deposit requirements.
• Whether the underlying tax and interest amounts are correct.
• Whether the required compliance history has been met.
• Whether reasonable cause or another form of relief may apply.

If AEP is automatically applied, the IRS will issue a notice identifying the covered penalty. If a penalty is assessed without relief, the taxpayer may still need to contact the IRS and request First Time Abate or reasonable-cause relief. The option to request FTA will only be available during the transition to AEP.

Do not consider the matter closed automatically

AEP removes eligible penalties, but it does not eliminate the underlying tax liability or related interest. It also does not prevent future penalties.

AEP should significantly reduce the administrative burden associated with first-time penalty relief. However, taxpayers should continue monitoring IRS correspondence, maintaining evidence of timely compliance, and evaluating whether the relief applied is the most appropriate option.

The UHY tax team can help taxpayers review IRS penalty notices, evaluate available relief, and identify process improvements that reduce the risk of future assessments.