Millions of taxpayers who make certain tax filing or payment mistakes could get a break from IRS penalties without having to ask.
Starting this summer, the IRS will automatically review taxpayers for First-Time Abatement relief, a program that can waive certain failure-to-file, failure-to-pay, and failure-to-deposit penalties for taxpayers with a clean compliance history.
The agency estimates the change could eventually help more than 1.5 million taxpayers each year. That’s compared with roughly 220,000 taxpayers who reportedly obtained similar relief under the previous process, which required taxpayers to request a penalty waiver after the IRS assessed a penalty.
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The new system will roll out for eligible 2025 individual federal income tax returns and 2026 quarterly returns, with a full transition expected in 2027.
But…While the IRS is changing how taxpayers receive penalty relief, the rules for who qualifies for so-called first-time relief haven’t changed. Here’s what you need to know.
New IRS automatic penalty relief
Under the previous first-time penalty abatement program, taxpayers generally had to wait until an IRS penalty was assessed and then request relief from the agency by phone, in writing, or using Form 843
That meant taxpayers had to know that penalty relief existed and then take action to request it.
The problem? Some eligible taxpayers never received relief simply because they were unaware of the program or didn’t know they qualified. Others found it challenging to obtain IRS assistance by telephone or to complete the required forms and processes without professional support.
The new Automatic Exemption from Penalty (AEP) process essentially moves the review earlier in the process and automates it.
- Now, during return processing, the IRS will check a taxpayer’s compliance history to determine whether the taxpayer qualifies.
- If the requirements are met, the IRS will automatically suppress the penalty before it is ever officially assessed.
- The taxpayer will receive a written notice explaining the relief.
“By automatically applying penalty relief, the IRS recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted,” IRS CEO Frank J. Bisignano stated in a release.
Although the process is just beginning, the new automated system is intended to replace the First-Time Abatement process for eligible returns due on or after Jan. 1, 2027.
To qualify, taxpayers generally must have:
- Filed required returns or requested a valid extension
- Paid any tax due or established an approved payment arrangement with the IRS
- No significant penalties during the previous three years (or 12 consecutive quarters for quarterly filers) on the same type of tax return
Keep in mind that the new automated process doesn’t mean all IRS penalties will disappear.
The relief generally applies only to eligible failure-to-file, failure-to-pay, and failure-to-deposit penalties. Additionally, certain returns, including information returns and some estate and gift tax returns, are not included.
Also worth noting: This new AEP process doesn’t eliminate the underlying tax owed or the interest that accrues on that tax.
Why the IRS changed the first-time penalty process
The change addresses a long-standing problem with First Time Abatement: Eligible taxpayers often missed out on relief because they did not know the program existed or that they needed to request it. That can be notable for some taxpayers, since a failure-to-file penalty, for example, is 5% of your unpaid taxes for each month the return is late, up to a maximum of 25%.
The Taxpayer Advocate Service (TAS) has argued that penalty relief should not depend on whether taxpayers understand the process, can reach the IRS, or have access to professional tax assistance.
National Taxpayer Advocate Erin Collins highlighted that concern when discussing the new system, writing the following in a blog post:
“For years, too many eligible taxpayers missed out on first-time penalty relief simply because they did not know it was available, did not understand how to request it, could not get through to the IRS, or did not have a tax professional advising them. That is especially true for low-income taxpayers and taxpayers who cannot afford representation. A penalty that may seem modest to some taxpayers can be financially significant for a taxpayer struggling to pay rent, utilities, groceries, transportation, or medical expenses.”
Take, for example, a taxpayer who filed and paid their federal income taxes on time for years but accidentally files a return late. Under the previous system, that taxpayer could incur a failure-to-file penalty, wait for the penalty notice to arrive, contact the IRS, and request First-Time Abatement relief.
Under the new process, the IRS can review the taxpayer’s compliance history while processing the return and automatically remove the penalty if the taxpayer qualifies.
The three-year clean history
When the IRS talks about a “clean compliance history,” that generally means the taxpayer hasn’t had a significant penalty assessed during the three years before the penalty year. For taxpayers who file quarterly returns, the IRS will generally look at the previous 12 consecutive quarters.
- A clean history also doesn’t mean a taxpayer has never made a mistake on their income tax return.
- The IRS will look at whether the taxpayer has generally met their tax obligations.
- As mentioned, that generally includes timely filing required returns and paying taxes owed/establishing an approved payment arrangement when needed.
Additionally, the three-year lookback applies to the specific (same) return type being filed. So a penalty on a business partnership return won’t disqualify your individual filing from automatic relief.
According to the IRS, the three-year rule also doesn’t mean a taxpayer can receive relief only once. If a taxpayer receives automatic relief and then maintains a clean compliance history for the required period, that taxpayer could potentially qualify for relief again in the future.
However, if a taxpayer fails the automated “clean history” check and doesn’t receive AEP relief, they aren’t necessarily out of luck. Taxpayers can still manually request a penalty waiver under the traditional IRS “reasonable cause” framework, which evaluates various sound reasons for non-compliance.
What happens if you receive an IRS penalty relief notice?
Under AEP relief, the IRS will issue a notice explaining that the penalty wasn’t assessed because the taxpayer met the relief requirements. Taxpayers who receive that notice generally don’t need to contact the tax agency or take additional action, according to the agency.
However, during the transition period, the IRS says some qualifying taxpayers may still receive penalty notices for eligible 2025 tax-year returns or 2026 quarterly returns.
- If you receive a penalty notice, it’s important to review it carefully.
- If you believe you qualify for first-time penalty relief and the penalty wasn’t automatically removed, you may still need to request relief under the existing process during the transition period.
- There should be a 1-800 number on the penalty notice for contacting the IRS.
If you want to track whether a penalty was removed, you can also review your official IRS Online Account.
Records there should show whether a penalty was assessed, whether relief was applied, and when the three-year compliance period begins for potential future eligibility.
As always, however, consult a qualified and trusted tax professional if you have questions or concerns about IRS penalties.
