The IRS Is Automating First-Time Penalty Relief – But Do Not Ignore the Notice
The IRS is changing how it provides relief from certain late-filing and late-payment penalties. Beginning in the summer of 2026, the IRS started transitioning from its longstanding First Time Abate process to a new program called the Automatic Exemption from Penalty, or AEP. Under the new process, eligible taxpayers generally will not need to call the IRS or submit a written request to obtain relief. Instead, the IRS is expected to identify qualifying taxpayers and apply the relief automatically. That sounds simple, and for many taxpayers, it should be an improvement. But “automatic” does not mean taxpayers should stop reviewing IRS notices carefully.
What Penalties May Be Covered?
EP generally applies to three common penalties:
- Failure to file a return on time;
- Failure to pay tax on time; and
- Failure to deposit payroll taxes on time.
Eligibility is based largely on the taxpayer’s recent compliance history. In general, taxpayers must have timely filed required returns and paid, or arranged to pay, their taxes during the prior three years. For quarterly filers, the IRS generally examines the preceding 12 quarters.
The program initially applies to eligible 2025 original returns and 2026 quarterly returns. For eligible returns with original due dates on or after January 1, 2027, AEP will fully replace First Time Abate.
What Should You Do if You Receive a Penalty Notice?
Do not assume that an IRS penalty notice is correct simply because relief is supposed to be automatic.
The IRS has acknowledged that, during the transition, some eligible taxpayers may still receive penalty notices. This may occur when a return was processed before the new system applied the exemption or when the IRS’s records do not reflect the taxpayer’s full compliance history.
Taxpayers who believe they qualify may still contact the IRS and request First Time Abate during the transition period.
When you receive a notice:
Review the tax period and penalty type: Determine whether the notice relates to a failure-to-file, failure-to-pay or failure-to-deposit penalty.
Check your recent filing history: Confirm that all required returns for the previous three years—or 12 quarters—were filed timely.
Confirm that payments were made or properly arranged: A filing history alone may not be sufficient if prior tax liabilities remain unresolved.
Look for a separate AEP confirmation notice: The IRS has indicated that taxpayers should receive notice when automatic relief has been applied.
Respond by the stated deadline: Even when a penalty appears eligible for relief, ignoring the notice can allow collection activity or additional interest to continue.
Not Every Return Qualifies
AEP does not cover every type of filing or every IRS penalty.
Certain information returns and transaction-specific filings may remain outside the automatic program. For example, estate tax returns and gift tax returns generally are not included. Penalties involving accuracy-related adjustments, substantial understatements, international information reporting or other specialized filing obligations may also require a separate legal and factual analysis.
Taxpayers should therefore avoid treating AEP as a blanket “one free mistake” rule.
Reasonable Cause Still Matters
AEP is an administrative waiver based primarily on prior compliance. It is different from reasonable-cause relief, which is based on the specific facts that caused the taxpayer to file or pay late.
Examples of potential reasonable cause may include:
- A serious illness or incapacity;
- A natural disaster;
- The death of a close family member or responsible employee;
- The destruction or unavailability of essential records; or
- Reliance on erroneous written advice from the IRS.
The National Taxpayer Advocate has raised concerns about how automatic relief will interact with reasonable-cause claims. If AEP is applied automatically for one year, it could affect whether the taxpayer qualifies for another administrative waiver during a later compliance problem. The Advocate has recommended allowing taxpayers to substitute reasonable-cause relief when the facts support it, but the IRS had not adopted that recommendation when the program was announced.
As a result, taxpayers with genuine reasonable-cause circumstances should still preserve the evidence supporting those circumstances, even when the IRS removes the penalty automatically.
Useful documentation may include medical records, insurance claims, disaster records, correspondence with tax professionals, proof of system outages and a written timeline explaining what happened and when corrective action was taken.
The Practical Takeaway
AEP should make penalty relief easier and more accessible for taxpayers with a strong compliance history. The National Taxpayer Advocate estimates that the automatic process could provide relief to substantially more taxpayers than the prior request-based system.
However, automatic relief is not the same as error-free relief.
Taxpayers should continue to:
- Open and review every IRS notice promptly;
- Confirm that the IRS applied AEP correctly;
- Request relief when an eligible penalty was not removed;
- Determine whether the return or penalty falls outside the program; and
- Preserve reasonable-cause documentation when unusual circumstances caused the noncompliance.
The new system may eliminate many routine phone calls to the IRS. It does not eliminate the need to review the taxpayer’s account, understand the available forms of relief and respond before important deadlines expire.