global Tax The IRS Is Changing How Penalty Relief Works. Here's What Taxpayers Need to Know September 03, 2026 The IRS is replacing its long-standing First-Time Abatement process with a new Automatic Exemption from Penalty (AEP) system beginning with 2025 tax returns. Learn how the new process could simplify penalty relief and what it means for individuals and businesses. Quick Takeaways The IRS is rolling out its new Automatic Exemption from Penalty (AEP) program to reduce the need for eligible taxpayers to request first-time penalty relief manually.Taxpayers generally need a strong compliance history, including timely filing and payment for the applicable lookback period.The AEP program excludes certain types of returns and does not apply to every IRS penalty.Even when a penalty is automatically waived, taxpayers may still owe the underlying tax and any applicable interest.During the transition, and even after AEP is fully implemented, taxpayers should confirm that any expected penalty relief was actually applied. Why it mattersUntil now, getting certain IRS penalties removed often meant picking up the phone, sending correspondence, or filing a formal request and waiting for the IRS to respond. The IRS is working to change that.Beginning with certain 2025 returns and 2026 quarterly returns, the IRS is rolling out a new Automatic Exemption from Penalty (AEP) program. Eventually, it will replace the familiar First-Time Penalty Abatement process. “On the surface, this sounds like a welcome change and in many cases, it should be. If eligible taxpayers receive penalty relief automatically, it could save significant time, frustration, and professional fees. But there are a few important details to understand before assuming automatic is always better.” - Mitchell Halpern What is the Automatic Exemption from Penalty (AEP) program?Under the previous First-Time Penalty Abatement process, taxpayers generally had to take action to request relief. Depending on the situation, that could mean calling the IRS, submitting correspondence, or filing Form 843 to request an abatement or refund.The new AEP program is designed to make that process more automatic.The AEP program replaces the need for many eligible taxpayers to manually request first-time penalty relief. Through the program the IRS will automatically waive certain penalties for taxpayers with a history of timely filing and payment. The change is expected to reduce taxpayer burden and expand access to penalty relief.What tax returns qualify for the AEP?The program begins with original returns for tax year 2025, 2026 quarterly returns, and future periods.However, not every return is eligible. The automatic exemption generally does not apply to:Information returnsReturns filed to report specific transactions or infrequent events, such as estate and gift tax returnsEligibility also depends on the taxpayer's compliance history.Similar to the previous First-Time Penalty Abatement rules, taxpayers generally need a history of timely filing and timely payment for the prior three years, or for quarterly filers, the prior 12 consecutive quarters.Which penalties can be removed?The AEP program applies to certain common penalties, including:Failure-to-file penaltiesFailure-to-pay penaltiesFailure-to-deposit penaltiesIt is important to note what isn't covered. The program does not eliminate:The underlying tax dueInterestSo, while the penalty may disappear, taxpayers can still owe tax and interest.When does the new program take effect?The IRS is phasing in the AEP program beginning in the summer of 2026, with the expectation that it will fully replace First-Time Penalty Abatement for returns with an original due date on or after January 1, 2027.During the transition period, taxpayers may still need to fall back on the traditional First-Time Penalty Abatement process if the automatic relief does not work as intended.Bear in mind, automatic does not necessarily mean you should stop reviewing every IRS notice carefully.How does AEP work?If taxpayer qualifies for AEP, applicable penalties should not be assessed by IRS during processing and the IRS will issue a notice confirming that relief was granted. No taxpayer action required.As with the existing First Time Abatement program, AEP is available only once every three years. Key tips for individuals and businesses:Review your IRS notices carefully. Even under an automatic system, confirm that eligible penalties were actually removed. Maintain a strong compliance history. Timely filing and payment remain important for qualifying for automatic relief. Don’t assume every penalty qualifies. Certain returns, penalties, and circumstances remain outside the AEP program. Keep records of your filing and payment history. Documentation can be helpful if you need to challenge a penalty that was not automatically waived. Know your options during the transition. If AEP does not apply or does not provide the expected relief, the traditional penalty-abatement process may still be available. Remember that tax and interest still apply. Penalty relief does not eliminate the underlying tax liability or associated interest. Reasonable cause relief remains an option. For taxpayers that don’t qualify for AEP, they can still request relief if reasonable cause exists. Additionally, taxpayers may want to consider substituting reasonable cause for AEP in order to preserve the once every three years “get out of jail free card” in the event reasonable cause does not exist in a future year, but exists in the current year. Talk with your tax advisor if you receive an unexpected penalty. A professional can help determine whether AEP, First-Time Penalty Abatement, or another form of relief may apply.
