On July 8, 2026, the IRS announced a significant change to its administrative penalty relief program. Beginning later this year, the IRS will implement a new Automatic Exemption from Penalty (AEP) program that will automatically provide penalty relief to qualifying taxpayers with a history of timely compliance. This change will gradually replace the long-standing First Time Abate (FTA) program. For many, the new process will simplify penalty relief and provide a more consistent application.

Background: First Time Abate

The IRS introduced FTA in 2001 as an administrative waiver designed to encourage voluntary compliance. FTA allowed those eligible to obtain relief from certain penalties if they maintained a clean compliance history during the prior three years.

FTA was widely available, but it was not automatic. While you didn’t have to specifically mention FTA, you had to contact the IRS to request penalty relief. The IRS would then review the account and determine FTA eligibility.

Shared Features of FTA and AEP

AEP carries forward the core purpose of FTA – providing administrative penalty relief to taxpayers with a history of timely compliance. Key similarities include:

• Both programs are administrative penalty relief programs, not statutory or regulatory exceptions.
• Both are based on the taxpayer’s prior compliance history. Generally, timely filing and payment compliance is required for the prior three years, or 12 consecutive quarters for quarterly filers.
• Both provide relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties.
• Neither program eliminates the taxpayer’s obligation to pay the underlying tax, interest, or penalties that are not eligible for relief.
• Those who do not qualify may still request penalty relief based on reasonable cause.

What's Changing Under AEP? 

Procedure

The most important change is procedural: AEP shifts the burden of administration from taxpayers to the IRS. Under FTA, you generally had to notice the penalty, know relief was available, and contact the IRS to request it. Under AEP, the IRS will automatically determine eligibility during return processing, will not assess eligible penalties when you qualify, and will issue a notice confirming that relief has been applied.

Timing

AEP also changes the timing of relief. Because eligible penalties are not assessed during processing, you may avoid the administrative burden of requesting abatement after receiving a notice. This is particularly significant for failure-to-pay penalties because, under AEP, the eligible penalty is not assessed during original return processing when relief applies. You remain responsible for the underlying tax, and interest on unpaid tax may continue to accrue until the balance is paid.

Reasonable Cause Interaction

AEP appears to continue the ordering between administrative relief and reasonable cause by applying administrative relief automatically before any taxpayer-initiated reasonable cause review, although the IRS may issue additional implementation guidance. Under the Internal Revenue Manual, requests for relief from these penalties, including requests based on reasonable cause, were first screened for FTA eligibility, and the IRS applied FTA before considering reasonable cause whenever the criteria were met. The National Taxpayer Advocate has suggested that the IRS should allow the option to use reasonable cause first to preserve AEP relief where the facts support reasonable cause.

FTA and AEP Comparison

Key point	First Time Abate (FTA)	Automatic Exemption from Penalty (AEP)
How relief is applied	Taxpayer must request relief from the IRS.	IRS applies relief automatically during return processing if the taxpayer qualifies.
Administrative burden	Taxpayer must identify the penalty and contact the IRS.	No taxpayer request is required for eligible returns.
Compliance-history standard	Generally based on three prior years of timely compliance, or 12 consecutive quarters for quarterly filers.    Generally based on three prior years of timely compliance, or 12 consecutive quarters for quarterly filers.	Generally based on three prior years of timely compliance, or 12 consecutive quarters for quarterly filers.
Eligible penalties	Failure-to-file, failure-to-pay, and failure-to-deposit penalties.	Failure-to-file, failure-to-pay, and failure-to-deposit penalties.
Types of eligible returns	FTA generally applied to many of the same common individual, business, and employment tax return series as AEP. FTA did not apply to returns filed once or infrequently, such as Forms 706 and 709, the Daily Delinquency Penalty, or information reporting dependent on another filing.	Applies to eligible original returns in common individual, business, and employment tax return series, including Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. AEP generally does not apply to returns filed once or infrequently, such as Forms 706 and 709, the Daily Delinquency Penalty, or information reporting dependent on another filing.
Notice to taxpayer	Relief generally follows IRS review of the taxpayer’s request. IRS issues a notice confirming that relief was applied.	IRS issues a notice confirming that relief was applied.

Transition Period

The IRS will begin phasing out FTA during summer 2026. For returns with original due dates on or after January 1, 2027, AEP will become the primary administrative relief mechanism and effectively replace FTA for eligible returns.

Observations

Although AEP should reduce the need for routine penalty abatement requests, you should continue to review penalty notices carefully during the transition period. Some eligible 2025 tax year returns and 2026 quarterly returns may still generate penalty notices before AEP is fully implemented. In those cases, don’t assume the notice is correct simply because relief was not applied automatically; requesting FTA under the existing procedures may still be necessary.

Where the facts strongly support reasonable cause, you may want to preserve that record and monitor future IRS guidance on whether taxpayers will be permitted to prioritize reasonable cause over AEP.

AEP should be paired with continued attention to deposit schedules, payment timing, and proper filings. The new process does not eliminate the underlying tax or interest, does not apply to every penalty, and does not cover all return types. 

For additional information, visit the IRS penalty relief page or contact us with questions on how this new program may impact you.
 

Published: 07/29/2026

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