IRS Automatic Penalty Relief: What Taxpayers Should Know for 2025 and 2026 Returns

Filing late or missing a payment usually isn't part of the plan; it just happens. As of the IRS's July 8, 2026, announcement, getting relief from the resulting penalty got a lot easier for eligible taxpayers.

The IRS is replacing its long-standing First Time Abate (FTA) request process with Automatic Exemption from Penalty (AEP) for eligible 2025 tax year returns and 2026 quarterly returns, with broader rollout to 2026 returns expected in 2027. Eligible taxpayers no longer need to know the program exists or ask for it. If you qualify, the IRS applies the relief on its own.

It's not a full pass, though. Your tax bill and any interest still stand, not every penalty type is covered, and the National Taxpayer Advocate has flagged a real tradeoff for taxpayers who might have qualified for a different kind of relief instead.

What Changed With IRS Penalty Relief?

For years, eligible taxpayers could request First Time Abate (FTA) if they had a good compliance history. The problem? Many people never knew the option existed.

The IRS is now introducing Automatic Exemption from Penalty (AEP) to make the process easier. Instead of contacting the IRS to request first-time penalty relief, eligible taxpayers will receive it automatically. The goal is to reduce paperwork, improve fairness, and help taxpayers who have a history of filing and paying on time.

AEP is rolling out in phases, not all at once. Following the IRS's July 8, 2026 announcement, it now applies to eligible 2025 tax year returns and 2026 quarterly returns. The IRS expects to extend it to 2026 returns more broadly in 2027, and for original returns due on or after January 1, 2027, AEP will fully replace FTA.

Sources:

• IRS, Administrative Penalty Relief
• Taxpayer Advocate Service, A Long-Awaited Taxpayer Win: The IRS Implements Automatic Penalty Relief

First Time Abate (FTA) vs. Automatic Exemption from Penalty (AEP)

Bottom line: Automatic Exemption from Penalty simplifies the process by eliminating the need for many eligible taxpayers to request relief. However, the eligibility rules remain similar, the rollout is happening in phases through 2027, and the program doesn't eliminate taxes owed or interest on unpaid balances.

What Is Automatic Exemption from Penalty?

Automatic Exemption from Penalty is the IRS's new administrative relief program that automatically provides relief from certain penalties for taxpayers who meet the eligibility requirements.

In many cases, taxpayers won't need to:

• Call the IRS
• Submit Form 843
• Write a penalty abatement letter
• Know that the program even exists

If your account qualifies, the IRS will typically apply the relief automatically and send you a notice.

Roughly 220,000 taxpayers received FTA relief through the manual request process in fiscal year 2025. Had AEP been active that same year, the National Taxpayer Advocate estimates it would have reached over 1.5 million taxpayers, roughly seven times as many, without a single phone call.

Which Penalties May Be Covered?

Automatic Exemption from Penalty (AEP) doesn't apply to every IRS penalty or every return type. Coverage also differs depending on whether you're an individual or a business.

• Individual taxpayers: AEP applies to Failure-to-File and Failure-to-Pay penalties.
• Business taxpayers: AEP applies to Failure-to-File, Failure-to-Pay, and Failure-to-Deposit penalties.

Failure-to-File Penalties

If you file your tax return after the deadline, the IRS may automatically waive an eligible Failure-to-File penalty if you qualify under the AEP rules.

Failure-to-Pay Penalties

If you file your return on time but don't pay the full tax due by the due date, you may qualify for automatic relief from an eligible Failure-to-Pay penalty. However, you'll still owe the unpaid tax, and interest may continue to accrue until your balance is paid in full.

Failure-to-Deposit Penalties

Businesses that are required to make federal tax deposits may also qualify for automatic relief from certain Failure-to-Deposit penalties if the deposit relates to an eligible return series and all AEP requirements are met.

What AEP Doesn't Cover

Some infrequently filed returns are excluded from AEP altogether, including Form 706 (United States Estate Tax Return) and Form 709 (United States Gift Tax Return). If your penalty relates to one of these filings, AEP won't apply, and you'll need to look into FTA or reasonable cause relief instead.

If you receive an IRS notice, review it carefully. Not every penalty notice will qualify for automatic relief.

Who May Qualify?

The IRS determines eligibility automatically based on your compliance history. You may qualify for Automatic Exemption from Penalty (AEP) if you have a strong record of meeting your federal tax obligations.

This includes:

• Filing all required tax returns for the previous three tax years (or the previous 12 consecutive quarters for quarterly filers)
• Paying or arranging to pay any taxes due on time
• Having no significant penalties during that compliance period, unless they were removed for an approved reason
• Meeting any other IRS eligibility requirements for the specific penalty and return series

The IRS reviews each account individually during original return processing, and if yours meets the requirements, relief is applied automatically; no separate request is needed.

Do Taxpayers Need to Request Relief?

For eligible taxpayers, usually no, which is the whole point of the redesign. Under the old system, you had to call the IRS or submit a written request to get a First Time Abate. Under AEP, qualifying relief is applied without you doing anything.

When AEP applies, the IRS sends a notice explaining that the penalty wasn't assessed because of your timely compliance history. You don't need to call, respond, or take any action on this notice. It's informational.

However, if your account isn't automatically updated during the rollout, you may still need to contact the IRS.

When Does AEP Start, and When Does It Fully Replace FTA?

The IRS announced AEP on July 8, 2026, and is implementing it in phases:

• Now: AEP applies to eligible 2025 tax year returns and 2026 quarterly returns.
• 2027: AEP is expected to expand more broadly to 2026 returns.
• January 1, 2027 forward: For eligible original returns due on or after this date, AEP will fully replace FTA.

During this transition:

• Some taxpayers may receive automatic relief immediately.
• Others may still need to request a traditional First Time Abate while the IRS completes implementation.
• IRS notices may continue to reflect the older process until the transition is complete.
• Some taxpayers with eligible 2025 or 2026 returns may still receive a penalty notice if their return was processed before AEP was available to their account.

If you were penalized earlier in 2026, before AEP took effect for your account, note that retroactive relief isn't currently guaranteed. The National Taxpayer Advocate has recommended the IRS apply AEP retroactively to these cases, but the IRS hasn't yet committed to doing so. If this applies to you, contact the IRS directly to ask about your options.

If you receive a penalty notice and believe you qualify, don't assume you have to pay it immediately. Review the notice carefully and contact the IRS if necessary.

What If You Still Receive an IRS Penalty Notice?

Receiving a penalty notice doesn't automatically mean the penalty is final.

First:

• Read the notice carefully.
• Verify that the penalty applies to your situation.
• Check whether you may qualify for Automatic Exemption from Penalty.
• Contact the IRS if you believe relief should have been applied.

Many taxpayers will receive updated notices if automatic relief is processed after the original penalty assessment.

If you need to call the IRS, have this ready:

• The IRS notice or letter
• The specific penalty you want relieved (failure-to-file, failure-to-pay, or failure-to-deposit)
• The tax year or tax period
• The reason you believe the penalty should be removed. For example, a compliant filing history that supports FTA or AEP, or documented circumstances that support reasonable cause
• Any supporting documentation, if you're requesting reasonable cause relief

If the IRS can't resolve the request by phone, you may need to submit a written request or Form 843, Claim for Refund and Request for Abatement. If the IRS denies your request, review the denial letter carefully. It may explain your appeal rights.

What Penalties and Charges Still Apply?

A lot of taxpayers trip up on one distinction: automatic penalty relief doesn't mean your entire tax debt disappears.

You may still owe:

• The original tax due
• Interest charged on unpaid tax
• Penalties that aren't covered by the automatic relief program

Estimated Tax Penalty

Automatic Exemption from Penalty generally doesn't apply to the Estimated Tax Penalty for underpaying quarterly estimated taxes. If you're self-employed, have investment income, or otherwise need to make estimated tax payments, you may still owe this penalty unless you qualify for a separate IRS exception or waiver.

If your tax balance remains unpaid, interest generally continues to accrue until the balance is paid in full. Even when a penalty is removed, the underlying tax liability remains your responsibility.

Want to understand what happens if you leave your tax balance unpaid? Learn more about what happens if you don't pay your taxes to understand how interest, collection actions, and additional consequences can affect your account.

Important: Using AEP Now Could Affect Future Relief

The IRS itself has acknowledged this tradeoff, and it's worth knowing about before you assume automatic relief is a pure upside.

Reasonable cause relief is grounded in the tax code and applies when specific facts and circumstances, such as a serious illness, a natural disaster, or records destroyed by fire or theft, prevented you from filing or paying on time. AEP, by contrast, is an administrative waiver based purely on your compliance history.

Because AEP is applied automatically, it can be used in a year where you'd also have qualified for reasonable cause relief, without the IRS checking first. That matters because using AEP in one year can reduce your eligibility for automatic relief in a later year, even if that later situation is one where reasonable cause would have applied.

Example: Say you file late one year because of a documented medical emergency (something that supports reasonable cause). The IRS automatically applies AEP instead of considering reasonable cause. Two years later, you file late again — this time without a qualifying reasonable-cause circumstance, but you would have qualified for AEP if it hadn't already been used. Because AEP was previously used, you may no longer be eligible for administrative relief for the second, unrelated situation.

There's currently no way to request that the IRS apply reasonable cause instead of AEP. The National Taxpayer Advocate has flagged this as a problem and recommended that the IRS fix it, but as of this writing, the issue remains unresolved.

What this means for you: If your penalty stems from a serious, documented circumstance, such as illness, disaster, or destroyed records, it may be worth proactively requesting reasonable cause relief rather than letting AEP apply automatically, since reasonable cause doesn't carry this same tradeoff.

Source: Taxpayer Advocate Service, A Long-Awaited Taxpayer Win: The IRS Implements Automatic Penalty Relief

What If You Don't Qualify?

Not everyone is eligible for Automatic Exemption from Penalty.

If you don't qualify, you still have options.

Depending on your circumstances, you may be able to:

• Request a payment plan
• Review whether the penalty was assessed correctly
• Request another form of penalty relief

The IRS offers several types of administrative relief beyond the automatic program.

How to Request Penalty Relief

If you don't qualify for Automatic Exemption from Penalty (AEP), you may still be able to request penalty relief through another IRS administrative relief program.

Depending on your circumstances, the IRS may consider requests based on:

• Reasonable cause, such as a serious illness, natural disaster, or other circumstances beyond your control.
• Statutory exceptions, which apply when the tax law provides relief for a specific situation.

In most cases, you'll need to contact the IRS or submit a written explanation explaining why the penalty should be removed. Supporting documentation may also be required.

Sources:

• IRS, Penalty relief for reasonable cause
• IRS, Penalty relief due to statutory exception
• Taxpayer Advocate Service, A Long-Awaited Taxpayer Win: The IRS Implements Automatic Penalty Relief

When to Consider Reasonable Cause Penalty Relief

If Automatic Exemption from Penalty doesn't apply, or if you'd rather not risk using up future AEP eligibility (see above), you may still qualify for reasonable cause relief.

Reasonable cause may be available when circumstances outside your control prevented you from filing or paying on time, such as:

• Serious illness
• Natural disasters
• Records destroyed by fire or theft
• Other unavoidable events that prevented compliance

Unlike Automatic Exemption from Penalty, reasonable cause relief generally requires an explanation and supporting documentation. The IRS reviews these requests individually.

The Bottom Line

The IRS's new Automatic Exemption from Penalty program is a significant improvement for taxpayers. Eligible individuals and businesses no longer need to know about First Time Abate or request it themselves. The relief shows up on its own.

Still, it's not a free pass. The tax and interest are yours regardless, coverage has real limits, and automatic doesn't always mean optimal. If a notice lands in your mailbox, read it closely and weigh whether reasonable cause might actually serve you better than letting AEP run on autopilot.

When in doubt, acting quickly can help prevent additional penalties and interest from adding up.

New to filing taxes? Our First-Time Filer's Guide walks you through your first federal tax return, common mistakes to avoid, and important IRS deadlines.