IRS making changes to first-time penalty relief
- Penalty relief will become automatic for many taxpayers under the IRS’s new Automatic Exemption from Penalty (AEP) program, allowing eligible taxpayers to receive relief without submitting a request.
- Taxpayers who previously missed out on penalty abatement due to lack of awareness, difficulty contacting the IRS or inability to navigate the process may now benefit automatically.
- Taxpayers may lose flexibility in how they use first-time relief. Previously, taxpayers could choose when to request first-time relief and potentially save it for a year with larger penalties. Under AEP, the IRS may automatically apply relief as soon as a taxpayer qualifies.
The IRS has introduced a significant change to the way it grants first-time penalty relief. Instead of requiring eligible taxpayers to request relief under the long-standing First-Time Abate (FTA) program, the IRS is transitioning to an Automatic Exemption from Penalty (AEP) program that will automatically provide relief to many qualifying taxpayers.
The change is intended to simplify tax administration, reduce paperwork and help ensure that eligible taxpayers receive relief even if they are unaware that it is available.
Many taxpayers who qualified for First-Time Abate never received it because they:
- Did not know the relief was available
- Could not reach the IRS
- Did not understand the process
- Could not afford professional tax representation
The IRS expects the new program to help hundreds of thousands of additional taxpayers each year while reducing unnecessary work for both taxpayers and the IRS.
How the previous FTA policy worked
Under the traditional First-Time Abate policy:
- The IRS first assessed the penalty.
- The taxpayer then requested FTA if the eligibility requirements were met.
- Taxpayers and their representatives could decide whether and when to use this valuable relief.
This flexibility sometimes allowed taxpayers to preserve their first-time relief for a future year if they anticipated a substantially larger penalty.
How the new automatic relief works
Under the AEP program:
- The IRS automatically determines whether the taxpayer qualifies.
- Eligible penalties are generally never assessed.
- Taxpayers do not need to contact the IRS or submit a request.
- The IRS will issue a notice explaining that the penalty was not assessed because of the taxpayer’s history of timely compliance.
The program applies to eligible failure-to-file, failure-to-pay, and failure-to-deposit penalties for taxpayers who satisfy the required compliance history. Not every return qualifies. Certain returns filed only for infrequent or special events, such as estate and gift tax returns, generally are not eligible.
Rollout schedule
The IRS is taking a phased rollout approach for AEP implementation. Key dates include:
- Summer 2026: The IRS begins applying AEP to eligible 2025 annual returns and 2026 quarterly returns.
- January 1, 2027: For eligible original returns with due dates on or after this date, AEP is expected to replace First-Time Abate as the standard method of providing first-time administrative penalty relief.
During the transition period, some taxpayers may still receive penalty notices for returns that qualify under the previous First-Time Abate procedures. During this time, taxpayers who believe they qualify may still request FTA.
Potential downside to AEP
While automatic relief is welcome news for most taxpayers, it also changes an important aspect of tax planning.
Under the previous system, taxpayers could decide when to request First-Time Abate. Under the new system, the IRS may automatically apply the relief whenever a taxpayer qualifies. As a result, taxpayers may lose the ability to preserve first-time relief for a future year that may involve substantially larger penalties.
Currently, the IRS has not published a procedure allowing taxpayers to decline automatic relief or reserve it for future use. The formal procedures have yet to be published in the Internal Revenue Manual.
IRS error and reasonable cause still matter
Automatic relief is only one method of obtaining penalty relief.
Taxpayers may still qualify for relief if a penalty resulted from:
- IRS processing errors
- Misapplied or misposted payments
- Other IRS administrative mistakes
- Circumstances establishing reasonable cause
These forms of relief remain available independently of AEP.
It would be beneficial for the IRS to clarify and refine the AEP program so that taxpayers who qualify for reasonable cause relief are not disadvantaged because AEP was automatically applied first.
How Wipfli can help
The tax professionals at Wipfli can help you assess any first-time penalty situations and determine how to best proceed during this transition from FTA to AEP. Start a conversation.
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