IRS streamlines penalty relief, replacing First Time Abate

The Internal Revenue Service said Wednesday it's introducing a new automatic process to provide penalty relief for taxpayers who have a history of filing and paying their tax debts on time, lessening the need for them to ask for assistance

The new process, known as Automatic Exemption from Penalty, will eventually replace the longtime First Time Abatement process for administrative relief. It's designed to simplify the penalty relief process and reduce the burden for those with a timely compliance history.

"Automatic Exemption from Penalty reflects the IRS' commitment to making the payment of taxes owed simpler and more consistent," said IRS CEO Frank Bisignano in a statement. "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 new AEP program is set to start this summer. It will apply to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, along with future tax periods. Taxpayers will be able to qualify if they have a history of filing their returns on a timely basis and paying any tax due in the three prior years (or 12 consecutive quarters for quarterly returns). When taxpayers qualify, penalties are not assessed during processing for failure to file. failure to pay or failure to deposit their taxes.

National Taxpayer Advocate Erin Collins praised the move in a blog post Wednesday. "The IRS's implementation of AEP is a major taxpayer win," Collins wrote. "It will help hundreds of thousands of taxpayers, reduce unnecessary burden, and conserve IRS resources."

Taxpayers won't need to take action to receive this relief. If they're eligible, the IRS will apply the AEP to them and issue a notice confirming that the relief was granted.

However, not all returns are eligible for the new program. For example, information returns and returns that are filed only in response to specific transactions or infrequent events (such as Form 706, U.S. Estate Tax Return or Form 709 Gift Tax Return) generally aren't eligible.

Up until now, First Time Abate has been the most common form of administrative penalty relief, allowing eligible taxpayers with a history of timely compliance to request the removal of certain penalties. The IRS plans to begin phasing out the First Time Abate program and transitioning to AEP this summer. During the transition, some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns, the IRS noted. Taxpayers who believe they qualify can contact the IRS to ask for First Time Abate. The new AEP program provides relief automatically and will replace First Time Abate for eligible returns with original due dates on or after Jan. 1, 2027. For more information, visit Administrative penalty relief. At an American Institute of CPAs conference last year, Collins announced that the program would soon become automatic in 2026, which seems to have resulted in this new AEP program.

In March, the AICPA sent a letter to the IRS asking it to expand the First Time Abatement program to cover other types of tax and information return penalties. 

Taxpayers who don't qualify for the automatic AEP program can still ask for penalty relief based on reasonable cause. The IRS said it will review those requests and notify taxpayers of the outcome. For more information, see Penalty relief for reasonable cause.

While AEP prevents the assessment of certain penalties, taxpayers must still pay any tax and interest due, as well as any penalties not eligible for relief.

The IRS said it's making the change to promote fairness and consistency in the application of penalty relief while encouraging voluntary compliance. By automatically recognizing taxpayers with a strong compliance history, the IRS said AEP would "reduce taxpayer burden and ensure penalty relief is applied fairly and equitably to all taxpayers."

Collins noted that under AEP, the IRS is largely retaining the core eligibility principles of FTA but changing how the relief is delivered.

"Instead of waiting for taxpayers to request relief, the IRS will automatically identify eligible taxpayers and suppress the assessment of certain penalties when they meet the requirements," she wrote. "Generally, taxpayers qualify for AEP if they have timely filed required returns and paid any tax due for the prior three years. For quarterly returns, taxpayers generally must have a timely compliance history for the prior 12 consecutive quarters. AEP applies during original return processing."

For eligible individual taxpayers, AEP will prevent failure-to-file and failure-to-pay penalties from being assessed, she noted. And for eligible business taxpayers, AEP prevents failure-to-file, failure-to-pay and failure-to-deposit penalties from being assessed.

But although she acknowledged AEP is a major improvement, she noted that one important problem remains.

"As with FTA, AEP may be applied before the IRS considers whether the taxpayer qualifies for reasonable cause relief," said Collins. "That matters because reasonable cause relief is grounded in statute and applies when the taxpayer's facts and circumstances justify relief. AEP, like FTA, however, is an administrative waiver. When a taxpayer qualifies for reasonable cause relief, the IRS should apply reasonable cause relief instead of using AEP. Otherwise, the taxpayer will lose the benefit of AEP in a future year when reasonable cause is not available."