IRS Automatic Penalty Relief 2026: AEP Replaces First Time Abate

For businesses and individuals with a timely compliance history, IRS penalty relief has always come with a catch: you generally had to ask for it. That is about to change.

On July 8, 2026, the IRS announced a new Automatic Exemption from Penalty (“AEP“), a systemic relief program that applies penalty relief automatically to taxpayers with a history of filing and paying on time (IR-2026-83).[1] Beginning in summer 2026, AEP takes over from the long-standing First Time Abate (“FTA”) process, though FTA remains available for prior-period returns and during the transition.[2] For eligible taxpayers, relief that once required a request, a phone call or a Form 843, will now be applied by the IRS during processing automatically and confirmed by written notice.

What Is AEP, the New Automatic IRS Penalty Relief Program?

The IRS begins the AEP program in the summer of 2026, and can apply it to 2025 tax-year returns and 2026 quarterly returns (and beyond). To be eligible for the AEP program, timely compliance history must be shown. Timely compliance history means that the same return type as the original return was timely filed for the prior three calendar years (or 12 consecutive quarters), and either no penalty (except the estimated tax penalty) was assessed, or a penalty was assessed but later abated for reasonable cause or IRS error.

For business taxpayers to have a timely compliance history, they must also meet two additional requirements: (1) The IRS cannot have waived the failure to deposit penalty four or more times during the prior three calendar years (or 12 consecutive quarters), and (2) the failure to deposit penalty has never been charged with respect to Electronic Federal Tax Payment System avoidance.

Which Tax Returns Are Eligible for AEP?

• Form 1040 (Individual Income Tax Return)
• Form 1065 (U.S. Return of Partnership Income)
• Form 1120 (U.S. Corporation Income Tax Return)
• Form 1120-S (U.S. Income Tax Return for an S Corporation)
• Form 940 (Employer’s Annual Federal Unemployment Tax Return)
• Form 941 (Employer’s Quarterly Federal Tax Return)
• Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees)
• Form 944 (Employer’s Annual Federal Tax Return)
• Form 945 (Annual Return of Withheld Federal Income Tax)
• Form CT-1 (Employer’s Annual Railroad Retirement Tax Return)

The AEP covers failure to file, failure to pay, and failure to deposit penalties with respect to the tax returns described above. Importantly, AEP does not erase the balance itself, and any underlying tax and any interest remain payable (however interest on the penalty can be abated as well). Nor does AEP apply to information returns and returns filed once (i.e., event-based filing requirements), the daily delinquency penalty (related to exempt organizations), or information reporting dependent on another filing. Specifically, Form 706, U.S. Estate Tax Return or Form 709, Gift Tax Return are not eligible.

The AEP program also provides a benefit over the FTA when it comes to the failure to pay penalty. Under the AEP program, the failure to pay penalty is not assessed. Compare this to the FTA where a failure to pay penalty could be assessed and continues to accrue on unpaid tax balances.

AEP also fixes a repeat-contact problem that FTA never addressed. Under FTA, a taxpayer could obtain relief, later have additional tax assessed for the same period, and then have to contact the IRS again to abate the penalty on the new balance. Under AEP, once relief is granted for a tax period, the IRS is not supposed to assess the covered penalties again for that period, even if additional tax is later assessed.

While it is not specific from the IRS’ release, two such information or event-based returns that are excluded from the ambit of AEP appear likely to include Forms 5471 and 5472. This may represent a slight departure from FTA: While abatement of penalties for the failure to file Form 5471 was generally excluded from the ambit of FTA, the Internal Revenue Manual (at 20.1.9.3.5 International Penalties) indicates that the $10,000 penalty for the failure to file Form 5471 can permissibly be abated if:

• The failure to file penalty for failing to file the form (1120 or 1065) that the Form 5471(s) should have been attached to is abated under FTA;
• The taxpayer had no similar failure to file penalties in the three prior periods; and
• The underlying Form 1120 or Form 1065 was timely-filed in the three prior periods.

There does not appear to be any similar extension of AEP to these types of returns at this time.  It appears “reasonable cause” relief will continue to be the main avenue for relief when dealing with such penalties.

Comparing FTA and AEP: Two IRS Penalty Relief Paths

	First Time Abate (FTA)	Automatic Exemption from Penalty (AEP)
Applicable time frame	Eligible 2025 tax-year and 2026 quarterly returns, plus all prior years/periods	2025 tax-year returns, 2026 quarterly returns, and all future tax years/quarters
How relief is obtained by the taxpayer	Taxpayer must contact the IRS and request it to receive abatement	No action required, IRS applies relief automatically during processing and issues a document confirming abatement
Eligibility	Penalty relief the first time a taxpayer is subject to one or more of the referenced penalties for a single return filed by the taxpayer	Timely filing and payment for the prior three years (or 12 consecutive quarters)
Penalty assessment	Penalty is assessed first, then removed once relief is approved	No penalty is assessed

Why the IRS Penalty Relief Transition Period Matters

As the IRS transitions away from FTA in summer 2026, some qualifying taxpayers may still receive penalty notices on otherwise-eligible returns. “Automatic” is unlikely to be seamless on day one.

Taxpayers who believe they qualify but are assessed a penalty can still contact the IRS to request FTA during the transition window. AEP is expected to fully replace FTA for eligible returns with original due dates on or after January 1, 2027.

 H2: What If You Don’t Qualify? Reasonable Cause Relief Explained

Taxpayers who fall outside AEP still have a path forward for IRS penalty relief based on “reasonable cause” (see Penalty relief for reasonable cause).[3] Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but was nevertheless unable to comply with those obligations.[4] The IRS decides these requests case-by-case, weighing all the facts and circumstances, and will expect the taxpayer to explain what happened in detail and provide supporting documentation.

What to Do During the IRS Penalty Relief Transition

• Read every penalty notice during the transition. Don’t assume relief was applied on your tax returns; verify it.
• Request FTA if you’re billed on an eligible return during the transition window and you otherwise would qualify for FTA.
• Know which of your returns are included and excluded from AEP.
• Document that a reasonable-cause basis also exists, even when AEP resolves a penalty, so you can rely on it in later periods where AEP may not apply.

 

For help determining whether AEP applies to your returns or whether a reasonable-cause request is worth pursuing if it doesn’t, please contact your KBF advisor for IRS penalty relief guidance. We can review your penalty exposure during the transition and help you build and substantiate a reasonable-cause claim, if necessary. Connect with your KBF engagement team for specific advice.

 

 

[1] See also the IRS Administrative Penalty Relief page, available at https://www.irs.gov/payments/administrative-penalty-relief

[2] According to the Internal Revenue Manual (“IRM”) Section 20.1.1.3.3.2.1 (as of November 25, 2025) the IRS would provide administrative relief as to certain penalties the first time a taxpayer is subject to one or more of such penalties for a single return filed by the taxpayer. The IRM lists certain “failure to file” penalties, “failure to pay” penalties, and “failure to deposit” penalties as applicable.

[3] See also IRM 20.1.1.3.2.

[4] Id.