The IRS is replacing First Time Abate: what Automatic Exemption from Penalty means for you
On July 8, 2026, the IRS announced that it is retiring First Time Abate, the penalty relief most taxpayers and tax professionals have relied on for years, and replacing it with a new program called Automatic Exemption from Penalty. The change is real, it started this summer, and most of the advice currently online about how to request penalty relief is now partly out of date.
The short version: if you have a clean compliance history and you file or pay late, the IRS will stop charging the penalty in the first place rather than charging it and removing it after you ask. You don’t have to call. You don’t have to write a letter. But there are conditions, there is a transition period where the old rules still apply, and there are situations where you still have to ask for relief the old way.
What changed
First Time Abate has been the most common administrative penalty waiver the IRS offers. It was available to taxpayers with three years of timely compliance, but you had to contact the IRS and request it, and the penalty was assessed first and removed afterward.
Automatic Exemption from Penalty, or AEP, works differently. The IRS checks your compliance history while your return is being processed, and if you qualify, the penalty is never assessed at all.
| First Time Abate | Automatic Exemption from Penalty | |
|---|---|---|
| How relief is granted | Not automatic | Automatic |
| What you have to do | Contact the IRS and request it | Nothing |
| The penalty itself | Assessed first, removed later | Never assessed |
| Failure-to-pay penalty | Keeps accruing until the tax is paid in full | Does not accrue on the unpaid tax |
That last row is the part with real money in it. Under the old system, a failure-to-pay penalty kept building while a balance sat unpaid, even after abatement of other penalties. Under AEP, for a qualifying taxpayer, it doesn’t accrue on the unpaid tax at all. For someone carrying a balance over several months, that is a meaningful difference.
Who qualifies
The test is a timely compliance history. Specifically, the same return type must have been filed on time, with any tax due paid, for the three prior years — or twelve consecutive quarters for quarterly filers. Either no penalty was assessed during that lookback, or a penalty was assessed and later abated for reasonable cause or IRS error. The estimated tax penalty doesn’t count against you.
Business filers have two additional conditions. The IRS must not have waived the failure-to-deposit penalty four or more times during the lookback period, and the failure-to-deposit penalty must not have been charged for avoiding the Electronic Federal Tax Payment System.
Eligible return series are Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1.
What it covers, and what it doesn’t
AEP applies to three penalties, regardless of amount: failure to file, failure to pay, and failure to deposit.
It does not apply to returns you file only once or infrequently — event-driven filings like Form 706 for estate tax or Form 709 for gift tax generally aren’t eligible. It also doesn’t cover the Daily Delinquency Penalty or information reporting that depends on another filing.
And it doesn’t touch the tax itself. You still owe the tax and the interest. AEP is about penalties only, which is the single most common misunderstanding we expect to see with this program.
The timing, which is where it gets confusing
AEP applies to eligible original returns starting with the 2025 tax year and 2026 quarterly returns, and to everything after that.
First Time Abate is being phased out across the summer of 2026 rather than switched off. During that transition, the IRS has said some qualifying taxpayers may still receive penalty notices for eligible 2025 tax year and 2026 quarterly returns. If you believe you qualify and you get a penalty notice anyway, you can still contact the IRS and request First Time Abate.
AEP fully replaces First Time Abate for eligible returns with original due dates on or after January 1, 2027.
For anything before the 2025 tax year, First Time Abate is still the path, and it still has to be requested. You can call the number in the top right corner of your notice, or send a written statement or Form 843 to the address in the Form 843 instructions. You don’t need to name First Time Abate specifically or attach documents — the IRS reviews your account to see whether you meet the requirements.
How you’ll know you got it
If AEP is applied, the IRS sends a notice explaining that even though the return was filed late, the tax was paid late, or a deposit was missed, the penalty wasn’t assessed because of your compliance history. You don’t need to respond to that notice.
If you receive a notice showing an assessed penalty and you believe you should have qualified, the IRS says to contact them. During the transition period specifically, that’s worth watching for rather than assuming the system got it right.
If you don’t qualify
Reasonable cause relief still exists and is unchanged. It’s a different standard — you have to show that circumstances outside your control prevented compliance, and the IRS reviews and decides case by case. Serious illness, a death in the immediate family, records destroyed by fire or flood, and similar circumstances are the sorts of facts that support it.
Reasonable cause takes documentation and a written explanation, and it doesn’t depend on a clean prior history the way AEP and First Time Abate do. For taxpayers with several bad years behind them, it’s often the only penalty relief on the table.
Why this matters if you already owe
Penalty relief and collection are separate conversations that get tangled together constantly. Removing or preventing a penalty reduces what you owe. It does not stop collection on what’s left.
If there’s still a balance after penalties are handled, the account moves through the collection process under IRM 5.19.1, and the usual sequence of notices, and eventually enforcement, applies to whatever remains. Field Collection handles abatements and adjustments under IRM 5.1.15, which is why penalty questions and collection questions sometimes end up in front of the same Revenue Officer.
In practical terms, that means AEP is genuinely good news for someone who had one bad year after a clean decade. It changes much less for someone several years behind, because the penalties were never the main problem in that situation — the underlying balance was.
How PFGTAX approaches penalty questions
The first step on any penalty question is the same as on any collection case: pull the actual account transcripts. Transcripts show which penalties were assessed, for which periods, under which code, and whether anything was already abated. Clients frequently believe a penalty is the bulk of what they owe when the transcripts show it’s a fraction, or the reverse.
The second step is checking the three-year lookback honestly. AEP and First Time Abate both turn on compliance history, and that history is a matter of record. Requesting relief you don’t qualify for wastes the one thing people in collection have least of, which is time.
Where a balance remains after penalties are addressed, the resolution work is the same as any other case: get current, document the financial picture, and match the situation to an installment agreement, hardship status, or an offer, depending on what the numbers actually support. In one California case, PFGTAX handled an installment agreement and penalty relief together for a married couple, because those were two parts of the same problem rather than two separate matters.
What to do now
If you filed or paid late for 2025 and you’ve been compliant for the three years before that, you may not need to do anything. Watch for a notice confirming relief was applied.
If you get a penalty notice for 2025 or a 2026 quarter and you think you qualify, don’t assume it’s settled. During the transition the IRS has said this can happen, and you can still request First Time Abate.
If you’re carrying penalties from 2024 or earlier, First Time Abate is still the route and it still has to be requested.
And if the penalties sit on top of a balance you can’t pay, the penalty question is the smaller half of the conversation.
Frequently asked questions
What is Automatic Exemption from Penalty?
It’s a new IRS program, announced July 8, 2026, that replaces First Time Abate. If you have timely filing and payment history for the three prior years — or twelve consecutive quarters for quarterly filers — and you file or pay late, the IRS won’t assess failure-to-file, failure-to-pay, or failure-to-deposit penalties in the first place. No request is needed. Call PFGTAX at 888.572.2179 to check whether your history qualifies.
Do I still have to ask for penalty relief?
For eligible 2025 tax year and 2026 quarterly returns going forward, no. For anything earlier, yes — First Time Abate still applies to prior periods and still has to be requested by phone or in writing. During the summer 2026 transition the IRS has said some qualifying taxpayers may still receive penalty notices, and you can request First Time Abate if that happens. PFGTAX can sort out which applies; call 888.572.2179.
Does this mean my tax debt is reduced?
Only the penalties. You still owe the tax itself and the interest, plus any penalty not eligible for this relief. If the balance is more than you can pay, that’s a separate conversation about installment agreements, hardship status, or an offer, and it depends entirely on your financial picture. Call PFGTAX at 888.572.2179 to talk through the whole balance, not just the penalty.
Which returns are eligible?
Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. Returns filed once or infrequently, such as Form 706 for estate tax or Form 709 for gift tax, generally are not eligible, and neither is the Daily Delinquency Penalty or information reporting that depends on another filing. If you’re unsure where your filing falls, call 888.572.2179.
What if my compliance history isn’t clean?
Reasonable cause relief is still available and hasn’t changed. It doesn’t depend on a clean prior record, but it does require showing that circumstances outside your control prevented you from filing or paying on time, with documentation. The IRS reviews these individually and notifies you of the decision. PFGTAX prepares reasonable cause requests regularly; call 888.572.2179.
This article is for general information only. It isn’t legal, accounting, or tax advice, and reading it doesn’t create a client relationship with PFGTAX. Every tax situation is different. Talk with a licensed tax professional about your specific circumstances before acting on anything here.