For years, many taxpayers and tax professionals have relied on one of the IRS's most useful administrative relief programs: First-Time Penalty Abatement (FTA). If you had a clean compliance history and made an honest mistake, you could often ask the IRS to remove certain penalties.
Starting this summer, that's beginning to change. The IRS is rolling out a new Automatic Exemption from Penalty (AEP) program that is designed to eliminate one of the most frustrating parts of the old process: having to ask for relief in the first place.
For compliant taxpayers, that's welcome news. But the transition won't happen overnight, and there are a few important details to understand.
01Goodbye "Please Remove My Penalty" Phone Calls
Under the current First-Time Penalty Abatement program, qualifying taxpayers generally must request relief after receiving a penalty notice. That often means calling the IRS, submitting correspondence, or having your tax advisor request the abatement on your behalf.
The new Automatic Exemption from Penalty program changes that.
If you qualify, the IRS will determine your eligibility during return processing and automatically remove eligible penalties before they are assessed. Instead of requesting relief, you'll receive a notice confirming that it was applied.
For many taxpayers, this should mean:
- Fewer IRS notices
- Less time spent on the phone with the IRS
- Faster resolution when an isolated mistake occurs
02Who Qualifies?
The IRS is rewarding taxpayers who have demonstrated a consistent history of compliance.
Generally, you'll qualify if you have:
- Timely filed your required returns during the prior three years (or the prior 12 consecutive quarters for quarterly filers), and
- Timely paid any tax due during that period.
In other words, this isn't a free pass for habitual late filers. It's intended for taxpayers with a strong compliance history who make an occasional mistake.
03Which Penalties Can Be Waived?
The new program applies to the same categories that were generally eligible under First-Time Penalty Abatement:
PenaltyEligible for Automatic Relief?Failure to fileYesFailure to payYesFailure to depositYesEstimated tax penaltyNo
Estimated tax penalties remain outside the program and generally cannot be removed under either the old First-Time Penalty Abatement rules or the new AEP program.
04Not Every Tax Return Is Covered
The automatic relief program does not apply to every type of tax return.
Certain returns are generally excluded, including those filed only because of specific transactions or infrequent events, such as estate and gift tax returns. Many information returns are also outside the scope of the program.
If you're dealing with specialized filings, don't assume automatic relief will apply.
05When Does This Take Effect?
The rollout begins during summer 2026, but the transition will occur in stages.
The IRS expects the Automatic Exemption from Penalty program to be fully implemented for eligible returns with original due dates on or after January 1, 2027.
Until then, there may be some overlap between the old and new systems.
06What About 2025 and 2026 Returns?
This is where taxpayers need to pay attention.
During the transition, some taxpayers who actually qualify for penalty relief may still receive IRS penalty notices for:
- 2025 tax returns
- 2026 quarterly returns
If that happens, don't assume the IRS has made a final determination.
Instead, you or your tax advisor may still need to request First-Time Penalty Abatement under the existing rules while the IRS completes the transition to the automatic system.
What This Means for Businesses For founders and business owners, this is a positive administrative change, but it shouldn't change your compliance habits. The best way to qualify is still the same: File returns on time. Pay taxes when due. Make payroll tax deposits on schedule. Address IRS notices promptly rather than letting them accumulate. Automatic relief is designed to help taxpayers with an otherwise clean record. It's not intended to replace good filing practices.
07Bottom Line
The IRS's new Automatic Exemption from Penalty program is one of those rare administrative changes that should reduce paperwork rather than create more of it.
If you maintain a solid filing history, the IRS will increasingly handle qualifying penalty relief automatically instead of requiring you to request it.
That said, the transition won't be complete until 2027. If you receive a penalty notice for a 2025 return or a 2026 quarterly filing and believe you qualify for relief, it's still worth reviewing the notice carefully. The existing First-Time Penalty Abatement process may still be available during the rollout.
Sometimes the best tax savings don't come from a deduction. They come from avoiding a penalty in the first place.
This article is general information, not tax or legal advice. The rules are fact-specific, change over time, and depend on details unique to your company. Talk to us about how they apply to your situation.