If you’ve ever been hit with an IRS penalty for filing or paying late, you may know that the agency has long offered a way out for taxpayers with clean records — but only if you knew to ask. That’s changing. This summer, the IRS began rolling out a new system that grants penalty relief automatically for eligible taxpayers. Here’s what’s new, who qualifies, and why “automatic” doesn’t mean you can stop paying attention.
What Changed
On July 8, 2026, the IRS announced a new program called Automatic Exemption from Penalty (AEP), which replaces the long-standing First Time Abate (FTA) waiver that has handled these situations for years.
Under the old First Time Abate system, if you had a history of filing and paying on time and then slipped up once, the IRS would assess the penalty — and it was up to you to call, write, or have a tax professional request that it be removed. Relief was routinely granted, but only to people who knew the program existed and asked for it. Many taxpayers simply paid penalties they never had to pay.
Under AEP, the IRS reviews your compliance history during return processing and simply does not assess the penalty in the first place. There’s no application, no form, and no separate request. When AEP applies, the IRS sends you a notice explaining that the penalty was not assessed because of your compliance history.
Which Penalties Are Covered
AEP covers three of the most common penalties taxpayers face:
- Failure-to-file penalty — for filing a return after the due date
- Failure-to-pay penalty — for paying the tax owed after the due date
- Failure-to-deposit penalty — for businesses that deposit payroll taxes late
The program applies to specific return types, including Form 1040 for individuals, Form 1065 for partnerships, Form 1120 for corporations, and the Form 941 series for employers filing payroll taxes.
Who Qualifies
Taxpayers qualify if they have a history of timely filing the return and paying any tax due in the three prior years — or 12 consecutive quarters for quarterly returns.
That’s the whole test. If you’ve been on time for the last three years and then miss a deadline this year, the penalty should never show up. If you’ve had even one late year in the prior three, or one late quarter in the prior twelve, you don’t qualify — and the penalty will be assessed as usual.
AEP applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, as well as future tax periods. For returns with original due dates on or after January 1, 2027, AEP will fully replace First Time Abate.
What AEP Does Not Do
This is where it’s important to read the fine print.
AEP does not eliminate the underlying tax liability or statutory interest. It only prevents the assessment of qualifying penalties and the interest that would have accrued on those penalties. You still owe the tax. You still owe interest on the unpaid tax. AEP just removes the penalty layer on top.
It also doesn’t cover everything. Information returns and returns filed only in response to specific transactions or infrequent events generally are not eligible. Penalties like the accuracy-related penalty, the estimated tax penalty, and penalties on late international information returns fall outside the program entirely.
The Transition Period Is Where People Get Caught
Here’s the part most coverage skips over. The changeover is not a clean switch on a single date, creating a window during which the old rules still matter.
The IRS has been direct about this: during the transition, some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns. If that happens, the relief isn’t automatic — you still have to contact the IRS and request First Time Abate under the old procedure.
In other words, if you get a penalty notice this fall for your 2025 return and you believe you should have qualified, don’t assume the IRS made the right call. The system may not have caught you, and the penalty won’t disappear on its own. During the transition, eligible 2025 returns processed before AEP went live can still generate penalty notices, and those taxpayers must request First Time Abate the old way.
If You Don't Qualify, You Still Have Options
Not qualifying for AEP doesn’t mean you’re stuck with the penalty. Taxpayers who don’t qualify may still request penalty relief based on reasonable cause if they believe they meet the requirements. Reasonable cause covers situations like serious illness, natural disasters, death in the family, or inability to obtain records — circumstances beyond your control that prevented you from meeting your obligations.
Reasonable cause requests are not automatic and are not routinely granted. They require documentation, a clear written explanation, and an understanding of what the IRS actually accepts. This is an area where having someone who knows how the IRS evaluates these requests makes a measurable difference.
What This Means for You
For taxpayers with clean records, AEP is good news — a penalty you might have paid unnecessarily in the past should now be suppressed before it ever hits your account.
But the change also raises the stakes for everyone else. One late year in the prior three, or one late quarter in the prior twelve, disqualifies a taxpayer — which makes cleaning up delinquent filings more valuable than ever. If you have unfiled returns or a history of late payments, getting current now isn’t just about resolving the past. It’s about rebuilding the compliance history that will protect you from penalties in the future.
At Morris and Associates, Ken Morris meets personally with every client to review their complete tax history — including whether penalties on their account should have been waived, whether a reasonable cause request makes sense, and what it would take to get back into good standing with the IRS. If you’ve received a penalty notice you don’t think you deserve, or you’re carrying back taxes and penalties from prior years, this is a good time to have someone take a careful look.
Contact Morris and Associates today for a free consultation.
Morris and Associates serves individuals and businesses throughout metro Atlanta and across Georgia. Call (678) 641-3193 or visit morristaxadvisors.com to get started.
