IRS Implements Automatic Penalty Relief for First-Time Offenders

The most common administrative penalty waiver provided by the IRS is through the First-Time Penalty Abatement Program (FTA).  The FTA relieves penalties assessed against a taxpayer for failing to timely file a tax return, pay a tax liability and/or deposit taxes, if the taxpayer meets the following requirements:

• Taxpayer filed the same return type, if required, for 3 years prior to the tax year with the penalty assessment;
• Taxpayer had no unresolved penalties for those 3 years, except estimated tax penalties, or the prior penalties were removed other than through the FTA;
• Taxpayer filed all currently required returns or filed an extension of time to file; and
• Taxpayer paid, or arranged to pay, any tax due.

To benefit from the FTA, a taxpayer must file a formal request for penalty relief with the IRS.

On July 8, 2026, the IRS announced a new automatic process to provide penalty relief for taxpayers with a history of timely filing their returns and paying any taxes due in the three prior years (or 12 consecutive quarters for quarterly returns).  The new Automatic Exemption from Penalty (AEP) will replace the FTA for eligible original tax returns, such as certain individual and business income tax returns (Forms 1040, 1065 and 1120), beginning with tax years 2025 and 2026 quarterly returns.  When a taxpayer qualifies, penalties are not assessed during processing for failure-to-file, failure-to-pay and/or failure-to-deposit.

Importantly, taxpayers do not need to take action to receive this relief.  If eligible, the IRS will apply AEP and issue a notice confirming that the relief was granted.

Not all returns or penalties qualify for AEP.  For example, information returns and returns filed only for certain transactions or infrequent events, such as Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return), and Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return), generally are not eligible.  AEP also does not eliminate the taxpayer’s obligation to pay tax, interest, or penalties that are not eligible for this relief.

Taxpayers who do not qualify for AEP relief, or whose penalties fall outside the AEP scope, can still seek a penalty waiver for reasonable cause based on facts such as serious illness, natural disasters, or other circumstances that prevented timely compliance.  However, that route requires a formal request and IRS review.

If you have any questions regarding this alert, please contact your Cummings & Lockwood private clients attorney.