IRS introduces automatic penalty relief for eligible taxpayers

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The IRS announced a significant change to its administrative penalty relief procedures with the introduction of the Automatic Exemption from Penalty (AEP) program on July 8.

The new initiative is designed to automatically provide penalty relief to taxpayers who have demonstrated a history of timely filing and payment compliance over the prior three years, reducing administrative burdens and eliminating the need for many taxpayers to request relief through the traditional First Time Abate (FTA) process.

Historically, eligible taxpayers seeking administrative penalty relief were generally required to contact the IRS and request FTA relief. Under the new AEP program, the IRS will automatically determine eligibility during return processing and, when applicable, will not assess certain penalties in the first place. Qualifying taxpayers will receive a notice confirming the application of penalty relief.

To qualify for AEP, taxpayers generally must demonstrate a strong compliance history by timely filing any required returns and timely paying taxes due. The IRS will look for a clean compliance history from the prior three tax years (or the prior 12 consecutive quarters for quarterly filers).

The agency indicated that certain filings will generally not be eligible for AEP, including many information returns, returns filed solely in response to specific transactions or infrequent events, and certain specialized returns, such as Form 706 (Estate Tax Return) and Form 709 (Gift Tax Return). Taxpayers should continue to evaluate whether penalties associated with information reporting obligations or specialized returns remain eligible for other forms of administrative or reasonable cause relief.

The IRS expects to implement the AEP program this summer and apply it to eligible original returns for tax year 2025 filings, 2026 quarterly filings, and future tax periods. The traditional FTA program will be phased out during 2026; during this period, some otherwise eligible taxpayers may still receive penalty notices for tax year 2025 returns or 2026 quarterly filings. In those situations, taxpayers who believe they qualify may still request penalty abatement under existing FTA procedures. According to the IRS, AEP will fully replace FTA for eligible returns with original due dates occurring on or after Jan. 1, 2027.

Taxpayers meeting the IRS eligibility requirements may automatically receive relief from failure-to-file, failure-to-pay and failure-to-deposit penalties. These penalties will not be assessed during processing when a taxpayer qualifies for AEP. Despite the IRS automatically applying the penalty relief, however, it is advised that taxpayers still confirm the IRS has properly abated any assessed penalties.

It is important to note that AEP impacts only qualifying penalties. Taxpayers remain responsible for any underlying tax liabilities, applicable interest charges, and penalties that are not eligible for automatic relief. In situations where taxpayers do not qualify for AEP, they may continue to seek penalty relief based on reasonable cause. The IRS has confirmed that requests for reasonable cause relief will continue to be reviewed under existing procedures.