No More Penalty Relief Requests: IRS Rolls Out Automatic Waivers

The IRS has announced a significant shift in how penalty relief is granted, introducing a new system called the Automatic Exemption from Penalty (AEP). This change is designed to streamline compliance and eliminate the need for eligible taxpayers to request relief that has historically been granted through administrative processes.

What Is Changing?

For years, taxpayers have relied on the First Time Abate (FTA) program to request relief from certain penalties. Under the new framework, the IRS will begin phasing out FTA and replacing it with AEP, a system that applies relief automatically when eligibility criteria are met.

This marks a notable procedural improvement: instead of filing a request or calling the IRS, qualifying taxpayers will receive penalty relief without taking any action.

When Does AEP Apply?

The AEP program is expected to begin implementation in summer 2026 and will apply to:

·         Original returns for tax year 2025

·         Quarterly returns for 2026

·         Future tax periods

Full replacement of FTA will occur for returns with original due dates on or after January 1, 2027.

Who Qualifies?

Eligibility for AEP is based on a taxpayer’s compliance history. Specifically:

·         The taxpayer must have filed and paid on time for the prior three years

·         For quarterly filers, this standard applies over the prior 12 consecutive quarters

If these criteria are met, the IRS will automatically waive penalties during return processing.

What Penalties Are Covered?

AEP applies to the most common compliance penalties:

·         Failure to file

·         Failure to pay

·         Failure to deposit

If eligible, these penalties will not be assessed, and the IRS will issue a notice confirming the relief.

Important Limitations

Not all filings qualify for AEP. Notably excluded are:

·         Information returns - Domestic &  Foreign.

·         Returns tied to infrequent or event-driven filings, such as Form 706 (estate tax) and Form 709 (gift tax)

These exclusions are particularly relevant for estate and wealth transfer planning, where penalty exposure will still require proactive management.

Transition Period Considerations

During the transition phase in 2026:

·         Some eligible taxpayers may still receive penalty notices

·         In those cases, First Time Abate may still be requested manually

Practitioners should monitor notices closely and be prepared to intervene where automatic relief has not yet been applied.

What If a Taxpayer Does Not Qualify?

Taxpayers who do not meet AEP criteria may still seek relief under the reasonable cause standard. The IRS will continue to evaluate those requests on a case-by-case basis.

It is also important to note that AEP does not eliminate the obligation to pay:

·         Underlying tax liabilities

·         Interest

·         Any penalties not covered by the program

Practical Takeaways

The introduction of AEP represents a meaningful administrative simplification. For compliant taxpayers, it removes friction from a process that was previously routine but time-consuming. 

However, advisors should remain attentive during the transition period and continue to evaluate penalty exposure for filings outside AEP’s scope.

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