If you typically file and pay your taxes on time but miss a deadline once, getting penalty relief may soon become much easier.
The IRS is replacing its long-standing First Time Abate program with a new Automatic Exemption from Penalty, or AEP. Under the new system, eligible taxpayers will receive relief automatically, without needing to call the IRS or submit a separate request in most cases. The change applies to eligible 2025 tax year returns and 2026 quarterly returns, and to future periods as well.
AEP can prevent certain penalties before they are assessed
First Time Abate generally required you to receive a penalty first and then ask the IRS to remove it. AEP changes that process. If you qualify, the IRS will review your compliance history when it processes your original return and avoid assessing certain penalties in the first place. You will receive a notice confirming that relief was applied.
AEP may cover three common penalties:
- Failure to file
- Failure to pay
- Failure to deposit
So, if you receive an IRS notice after a late filing, payment, or deposit, read it carefully before assuming you owe a penalty. The IRS may have already applied AEP.
Your prior compliance history is the key
The main requirement is a history of timely compliance. For annual returns, the IRS generally looks at the prior three years. For quarterly returns, it looks at the prior 12 consecutive quarters. The rules also consider your prior penalty history, though a penalty previously removed due to reasonable cause or IRS error generally does not count against you. Estimated tax penalties are typically excluded as well.
Business taxpayers have additional requirements involving prior failure-to-deposit penalties. The practical takeaway is straightforward: maintain clean filing and payment records. A strong compliance history now provides an added safety net when you make an occasional mistake.
Many common business and individual returns are eligible
Current IRS guidance lists several return series that may qualify for AEP, including Forms 1040, 1065, and 1120, as well as Forms 940, 941, 943, 944, 945, and CT-1.
However, AEP does not apply to every return or every penalty. Returns filed only occasionally due to a specific event generally do not qualify, including information returns and event-based filings such as Form 709 Gift Tax Returns. AEP also does not cover accuracy-related penalties or daily delinquency penalties. Before assuming a penalty will disappear automatically, confirm that both the return and the penalty are covered.
First Time Abate is being phased out, not disappearing overnight
The transition creates an important timing issue. First Time Abate remains available for certain older returns and returns processed before AEP becomes operational, including eligible 2024 returns and certain 2025 and 2026 filings processed before AEP begins. In those cases, you may still need to contact the IRS to request relief. For eligible original returns with due dates on or after January 1, 2027, AEP will replace First Time Abate entirely.
Do not ignore a penalty notice simply because you think AEP applies. During the transition, the timing of the return and IRS processing may determine whether relief is automatic or whether you still need to request First Time Abate. If you receive a penalty notice for a 2025 or 2026 period, have your Saville team member review it before paying.
Penalty relief does not erase the underlying tax or interest
AEP is penalty relief, not forgiveness of the tax itself. You still owe any unpaid tax, and interest may continue to accrue. The IRS also expects taxpayers to continue filing, paying, and making required deposits by their normal deadlines. Treat AEP as a safety net for an occasional compliance problem, not a reason to delay filing or payment.
Reasonable cause relief is still available
Failing the AEP requirements does not mean you are out of options. The IRS continues to allow taxpayers to request penalty relief based on reasonable cause, which generally requires showing that you exercised ordinary business care and prudence but were unable to meet the requirement. A serious illness, casualty, natural disaster, or another circumstance outside your control may support a request depending on the facts.
What this means for taxpayers
AEP should make routine penalty relief easier for taxpayers who have consistently met their obligations. But automatic does not mean universal. Eligibility still depends on the return involved, your prior compliance history, the type of penalty, and the timing of the filing.
If you receive an IRS penalty notice, do not assume the amount is final. You may qualify for AEP, First Time Abate during the transition period, or reasonable cause relief. For more information, please reach out to your Saville team member.