IRS Penalty Relief Just Got Easier for Many Taxpayers

For years, the IRS has offered a First Time Abatement (FTA) program to forgive certain penalties for taxpayers who generally have a good history of filing and paying their taxes on time. The catch? Taxpayers (or their tax professionals) usually had to know the program existed and specifically ask the IRS to apply it.

Beginning with 2025 individual tax returns and 2026 quarterly business returns, the IRS is introducing a new Automatic Exemption from Penalty (AEP) program that makes the process much simpler.

How the First Time Abatement (FTA) Program Worked

Under the traditional FTA program, taxpayers could request that the IRS remove certain penalties if they had maintained a good compliance history. In general, a taxpayer qualified if they had:

• Filed their tax returns on time during the previous three years.

• Paid, or made arrangements to pay, any taxes owed.

• Had not previously incurred significant penalties during that period.

If eligible, the IRS could remove common penalties such as:

1. Failure-to-file penalties

2. Failure-to-pay penalties

3. For businesses, failure-to-deposit payroll tax penalties

The biggest drawback was that the relief was not automatic. Many eligible taxpayers paid penalties simply because they didn't know to request the abatement.

What's Changing?

The new Automatic Exemption from Penalty (AEP) program keeps most of the same eligibility rules but changes how the relief is delivered.

Instead of waiting for taxpayers to request penalty relief, the IRS will automatically determine whether a taxpayer qualifies during return processing. If the taxpayer has a history of timely filing and payment, eligible penalties simply won't be assessed in the first place.

Taxpayers who qualify will receive a notice informing them that the penalty relief has been applied automatically.

Who Qualifies?

Generally, taxpayers qualify if they have:

• Timely filed required tax returns for the previous three years (or 12 consecutive quarters for quarterly business filings).

• Paid their tax liabilities as required during that period.

The program applies only to certain tax returns. Some specialized returns, such as estate and gift tax returns, generally are not eligible.

What Doesn't Change?

The new program only eliminates certain penalties. It does not eliminate the underlying tax owed or any interest that accrues on unpaid taxes.

In addition, taxpayers who don't qualify for AEP may still request penalty relief if they had a legitimate reason for filing or paying late, such as a serious illness, natural disaster, or other circumstances beyond their control. This is known as reasonable cause relief and remains available.

One Important Consideration

Although AEP is a welcome improvement, taxpayers should still work with their tax advisor if penalties are involved.

If a taxpayer qualifies for reasonable cause relief, that may be the better option. Using AEP counts as the taxpayer's administrative "free pass." Preserving AEP for a future year could be beneficial if another unexpected issue arises and reasonable cause doesn't apply.

Bottom Line

The new Automatic Exemption from Penalty program is a significant taxpayer-friendly change. Rather than requiring eligible taxpayers to request relief, the IRS will automatically waive qualifying penalties for those with a strong compliance history. The result should be fewer unnecessary penalties, less paperwork, and a simpler experience for taxpayers who have consistently met their tax obligations.