IRS penalty abatement: new automatic exemption

On July 8, 2026, the IRS replaced the First Time Abate penalty relief program with a new Automatic Exemption from Penalty (AEP) system. This system automatically awards taxpayers with penalty relief if they are current on their tax filings and payments for either the prior three years or 12 consecutive quarters for quarterly returns.

The relevant penalties that this program applies to are Failure to File, Failure to Pay, and Failure to Deposit, the same as the previous program. Eligible taxpayers will automatically get penalty relief through the AEP system and will receive a notice confirming the relief was applied. Tax due plus any applicable interest must still be paid regardless of penalty relief received. Only certain types of returns will be eligible for AEP; examples of returns that will not be eligible are informational forms and forms filed only for certain situations, such as Estate and Gift Tax.

“Automatic Exemption from Penalty reflects the IRS’s commitment to making the payment of taxes owed simpler and more consistent,” said Frank J. Bisignano, chief executive officer of the IRS and commissioner of the Social Security Administration. “By automatically applying penalty relief, the IRS recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.”

The AEP program is already in place for tax years 2025 and 2026, and will completely replace First Time Abate for tax returns that are due on or after Jan. 1, 2027. For tax preparers, this program will simplify their post-tax season IRS representation workload by automating the most common and easiest penalty abatement request processes. This new program is a win for taxpayer rights, as well as a resource conservation move for taxpayer representative CPAs/EAs and the IRS. Ideally this will also free up IRS phone lines and mailboxes for more substantive issues and questions. 

For those who do not qualify for AEP due to a lack of perfect past compliance, there are still routes to penalty relief based on reasonable cause. Reasonable causes can include acting in a responsible manner by requesting applicable extensions, and attempting to fix issues and failures. Taxpayers will need a mitigating factor such as being a first-time filer of this particular form, a good compliance history, negligent actions of another person, including an IRS agent, lack of access to relevant records, or economic hardship.

Tax practitioners should still be prepared to request First Time Abate until Jan. 1, 2027 for taxpayers who receive penalty notices. A lack of IRS notice that AEP was applied means that the taxpayer still needs to request penalty relief manually. In addition, for clients who are ineligible for AEP, tax practitioners should be prepared to look at every applicable reasonable cause fact and document to ensure that the taxpayer can seek relief if they have an eligible fact pattern.

Taxpayers who receive a penalty notice for 2025 and 2026 tax or quarterly returns must still go through the original process to request First Time Abate. Tax preparers assisting with penalty abatement work on the taxpayers’ behalf should be prepared to have the following as documentation: 

• The IRS notice or letter.
• The specific penalty name that the taxpayer wants relief from.
• The relevant tax year.
• A reason the penalty should be removed.
• Any provable reasonable cause.

Requesting First Time Abatement can be done with an IRS phone call, written correspondence, or Form 843, Claim for Rebate and Request for Abatement. Phone tends to be the fastest method; the Practitioner Priority Line tends to be faster for tax preparers to get through than the taxpayer trying to call the main support number.

As a preparer, make sure that you are either the paid preparer on the return with the box checked to allow IRS communication, or that you have Form 2848, Power of Attorney and Declaration of Representative, on file for your client’s relevant tax return year. You can also respond to the notice by writing a letter to the address listed on the IRS correspondence, but this method takes longer and requires a detailed explanation of the fact pattern and copies of documentation to ensure that the IRS has a full understanding of the reasonable cause for relief.

The National Taxpayer Advocate’s office is very enthusiastic about this change because this program has the potential to significantly improve taxpayers’ access to relief they’re entitled to. Previously less than 15% of taxpayers who were eligible for penalty relief made requests to the IRS to receive it. The automation of this program should help substantially reduce the penalty burdens on one-time accidental offenses as well as reduce contact between IRS agents and taxpayers.

Editor’s note: Visit the IRS news hub on the Intuit® Tax Pro Center for continuous updates.