IRS Replaces First Time Penalty Abatement Program with Automatic Penalty Relief in 2026

Jul 29

4 min read

For decades, the IRS has provided taxpayers with an important form of penalty relief known as First Time Abatement (FTA). This administrative waiver allowed eligible taxpayers with a previously clean compliance history to request relief from certain IRS penalties, including failure-to-file, failure-to-pay, and failure-to-deposit penalties.

The purpose of the First Time Abatement program was to recognize that even taxpayers who generally comply with their tax obligations can occasionally experience a mistake, misunderstanding, or temporary hardship that causes them to miss a filing deadline or payment requirement.

Rather than permanently penalizing taxpayers for a single compliance failure, the IRS created FTA as a way to encourage future compliance while providing relief for taxpayers who otherwise maintained a strong history of meeting their tax obligations.

What Was the IRS First Time Abatement Program?

Historically, First Time Abatement was not automatic. Taxpayers—or their authorized representatives, such as CPAs and tax professionals—were required to identify eligibility, contact the IRS, and request that the penalties be removed.

The IRS would then review the taxpayer’s filing and payment history to determine whether they qualified.

The IRS would then review the taxpayer’s filing and payment history to determine whether they qualified.

Generally, taxpayers had to meet several requirements to receive First Time Abatement:

• The taxpayer filed all required tax returns or filed a valid extension.

• The taxpayer paid, or arranged to pay, any taxes currently due.

• The taxpayer maintained a clean compliance history for the prior three years.

• The penalty involved a qualifying issue, such as failure-to-file, failure-to-pay, or failure-to-deposit.

While First Time Abatement has been an important tool for taxpayers and tax professionals, the process has historically created unnecessary administrative burdens.

Eligible taxpayers often had to wait on hold with the IRS, submit written requests, or work through their tax professional to obtain relief for penalties they already qualified to have removed.

IRS Introduces Automatic Exemption from Penalty (AEP)

Erin Collins, the National Taxpayer Advocate, announced that the IRS is replacing the traditional First Time Abatement (FTA) process with a new program called the Automatic Exemption from Penalty (AEP).

Instead of requiring an eligible taxpayer—or their representative—to request penalty relief after a penalty has already been assessed, the IRS will determine eligibility during return processing and prevent the penalty from being assessed in the first place.

For eligible taxpayers, the process will work as follows:

The taxpayer files their return.
The IRS automatically reviews the taxpayer’s compliance history.
If the taxpayer qualifies:
- The failure-to-file penalty will not be assessed.
- The failure-to-pay penalty will not be assessed.
- The failure-to-deposit penalty will not be assessed.
The IRS will send a notice confirming the automatic penalty relief.

The taxpayer will no longer need to call the IRS, submit a separate request, or wait for approval.

When Will Automatic Penalty Relief Begin?

The IRS will begin implementing the Automatic Exemption from Penalty (AEP) program in Summer 2026.

The initial rollout will apply to:

• 2025 original income tax returns

• 2026 quarterly employment tax returns

• Future tax returns as IRS processing systems continue to be updated

This change represents a significant improvement in how penalty relief is handled and should reduce unnecessary taxpayer frustration and IRS administrative workload.

First Time Abatement May Still Be Available for Prior Tax Years

Although AEP will simplify penalty relief going forward, taxpayers should not assume that all prior penalties will automatically disappear.

The new system will generally apply only to eligible returns processed after implementation begins.

Taxpayers who received IRS penalties for earlier years may still qualify for traditional First Time Penalty Abatement. If you received an IRS notice assessing penalties, it is important to review whether you have a qualifying compliance history and whether requesting penalty relief could eliminate unnecessary charges.

The IRS transition to AEP may also create situations where taxpayers receive penalty notices even after the program begins. These notices should be carefully reviewed to determine whether automatic relief was properly applied or whether additional action is required.

For taxpayers facing IRS penalties, understanding the difference between the new Automatic Exemption from Penalty (AEP) program and the traditional First Time Abatement process can help ensure they receive all available relief under IRS rules.

Need Help Resolving IRS Penalties or Tax Notices?

At First Financial, we help taxpayers navigate complex IRS issues and find solutions when tax problems become overwhelming.

If you are receiving IRS notices, facing tax penalties, or unsure whether you qualify for penalty relief programs like First Time Penalty Abatement or the new Automatic Exemption from Penalty (AEP), our team can help you understand your options and determine the best path forward.

Our tax resolution practice advocates on your behalf with the IRS and works to achieve the best possible outcome based on your unique circumstances.

Whether you need assistance with penalty abatement, IRS negotiations, payment options, installment agreements, or other tax resolution strategies, we provide experienced guidance to help you resolve your tax issues and move forward with confidence.

Contact First Financial today to learn how we can help you address IRS penalties, resolve tax problems, and protect your financial future.