IRS Introduces Automatic Penalty Relief for Eligible Taxpayers

For many years, taxpayers with a history of filing and paying their taxes on time have been eligible for administrative penalty relief through the IRS’s First Time Abate program. If a qualifying taxpayer received certain penalties, generally for a late filing or a late payment, they could contact the IRS and request that those penalties be removed.

In July 2026, the IRS announced a significant change to that process. Through a new program called Automatic Exemption from Penalty (AEP), qualifying taxpayers may receive penalty relief automatically, eliminating the need to submit a request in many situations.

The change is intended to reduce administrative burden for both taxpayers and the IRS while simplifying an area that has historically required additional correspondence and follow-up.

While the announcement represents a positive development for many individuals and businesses, taxpayers should still understand how the program works, what penalties may qualify, and when professional guidance may still be beneficial.

What Is Automatic Exemption from Penalty?

The IRS’s new Automatic Exemption from Penalty program is an administrative relief process designed for taxpayers with a strong compliance history. Under the previous First Time Abate framework, qualifying taxpayers generally needed to request relief after a penalty had already been assessed. Under AEP, the IRS may apply that relief automatically during return processing.

According to the IRS, the new process applies to eligible original returns beginning with tax year 2025, certain 2026 quarterly returns, and future tax periods. Rather than requiring taxpayers to initiate contact, the IRS intends to identify qualifying situations and apply relief automatically when eligibility requirements are met.

This represents a notable shift in approach. Historically, many compliant taxpayers ultimately received relief through First Time Abate, but only after investing time and resources to request it. The new system is intended to streamline that process and reduce unnecessary administrative work.

Eligibility Requirements

The IRS has indicated that taxpayers may qualify for AEP if they have a history of timely filing and paying taxes during the preceding three years. For quarterly returns, the IRS generally looks at 12 consecutive quarters of compliance history.

If eligible, taxpayers may receive automatic relief from certain penalties, including:

• Failure-to-file penalties
• Failure-to-pay penalties
• Failure-to-deposit penalties

Importantly, the relief applies only to qualifying penalties. Taxpayers remain responsible for any underlying tax liability, applicable interest, and penalties that do not qualify for relief.

The IRS has also indicated that not all returns will qualify. Certain transaction-specific returns and infrequently filed returns may be excluded from the program. As with many IRS administrative programs, eligibility ultimately depends on the specific facts and filing requirements involved.

How the New Process Works

Although no taxpayer intends to incur penalties, they are more common than many people realize.

A penalty does not necessarily indicate significant noncompliance. In some cases, it may result from a payment being submitted a few days late, an estimated tax payment issue, or an administrative oversight. Many penalties are relatively modest, but dealing with the notice can still require time and effort. Penalties related to payments are fairly common and can sometimes arise from something as simple as a late estimated tax payment.

By automatically applying relief for eligible taxpayers, the IRS aims to reduce administrative burden for taxpayers and streamline processing for the agency. The change reflects a broader effort to simplify interactions for taxpayers who generally maintain a strong compliance history and reduce unnecessary administrative steps.

For taxpayers with a strong compliance history, the change may reduce the time and effort spent responding to penalty notices or requesting relief that previously would have been granted through the First Time Abate process. By applying relief automatically when eligibility requirements are met, the IRS is seeking to simplify the process for taxpayers while reducing administrative workload for the agency.

IRS Penalties Have Not Been Eliminated

While the new program may prevent certain penalties from being assessed for eligible taxpayers, penalties have not been eliminated altogether.

As the IRS transitions from First Time Abate to Automatic Exemption from Penalty, there may still be situations where qualifying taxpayers receive notices or where automated systems do not immediately identify eligibility. The IRS has acknowledged that certain taxpayers may continue to receive penalty notices during the transition period and may still need to request relief.

In addition, taxpayers may encounter penalties that do not qualify for AEP or situations where additional review is necessary.

For that reason, taxpayers should continue to review all IRS correspondence carefully and avoid assuming that every penalty notice will resolve itself automatically.

If You Receive an IRS Penalty Notice

Our guidance remains the same as it has always been: if you receive a notice from the IRS or another taxing authority, forward it to your advisor promptly.

Even with the implementation of AEP, there may be instances where relief is available but has not yet been applied. There may also be deadlines associated with responding to notices, making it important to address correspondence quickly.

The sooner a notice is reviewed, the more options may be available.

Other Relief Opportunities Still Exist

One of the most important aspects of the IRS announcement is what did not change.

Automatic Exemption from Penalty is only one form of penalty relief. Taxpayers who do not qualify may still have other options available, including relief based on reasonable cause.

Reasonable cause relief generally requires demonstrating that circumstances beyond the taxpayer’s control contributed to the compliance issue. While approval depends on the facts and circumstances of each case, it remains an important avenue for taxpayers who do not qualify for automatic relief.

There may also be situations where reasonable cause relief is the stronger option. Because every taxpayer’s circumstances are different, evaluating all available relief opportunities can help determine the most effective path forward. In some cases, preserving administrative relief opportunities for future use may be an important planning consideration.

What This Means for You

The IRS’s new Automatic Exemption from Penalty program is a positive development for many taxpayers. By automatically granting relief to qualifying individuals and businesses, the IRS is reducing administrative burden and simplifying a process that historically required taxpayers to request assistance.

However, the new process does not eliminate penalties altogether, nor does it replace the need to review IRS notices carefully. Taxpayers should continue filing and paying on time, maintaining good records, and forwarding correspondence from taxing authorities to their advisors as soon as it is received.

If a penalty notice arrives, it is important not to assume that relief is unavailable. Automatic relief, reasonable cause relief, and other penalty abatement strategies may still provide opportunities to reduce or eliminate penalties depending on the circumstances.

If you have questions about an IRS notice or would like to understand how these changes may affect your situation, contact your Kernutt Stokes tax advisor.