Practitioner’s Tax Action Bulletin®
Background
For years, the IRS has offered penalty relief to taxpayers with a strong compliance history who make honest mistakes. Known as First Time Abate (FTA), the program can remove certain failure-to-file, failure-to-pay, and failure-to-deposit penalties for taxpayers who were compliant during the previous three years. However, the relief was not automatic. Taxpayers had to request it after a penalty was assessed, leaving many eligible individuals unaware of the benefit or unable to navigate the process, especially unrepresented taxpayers or those with limited resources.
Introducing the Automatic Exemption from Penalty (AEP) Program
In a significant change to its penalty relief procedures, the IRS has announced a new Automatic Exemption from Penalty (AEP) program that will automatically waive certain penalties for eligible taxpayers with a strong compliance history. Announced in IR-2026-83, the program eliminates the need for taxpayers to request relief and is intended to replace the long-standing First Time Abate (FTA) program.
The AEP rollout will begin in summer 2026 for eligible 2025 individual returns and 2026 quarterly returns. It is scheduled to fully replace FTA for returns with original due dates on or after 1/1/27.
To qualify, taxpayers generally must have timely filed required returns and paid any tax due during the previous three years, or the preceding 12 quarters for quarterly filers. During return processing, the IRS will automatically identify eligible taxpayers and suppress assessment of certain failure-to-file, failure-to-pay, and failure-to-deposit penalties.
Taxpayers who receive AEP relief will be notified that a penalty was not assessed because of their compliance history, and no action will be required on their part. By making relief automatic, the IRS aims to ensure that eligible taxpayers receive the benefit consistently while reducing administrative burdens for both taxpayers and the agency.
Transition and Hidden Pitfalls
While the AEP program is a major improvement for both taxpayers and tax administration, practitioners should pay close attention to how the new system is implemented. By making penalty relief automatic, the program will allow millions of eligible taxpayers to receive benefits they might otherwise have missed, regardless of whether they are represented by a tax professional. The change should also reduce the need for written requests to the IRS, freeing practitioners to focus on more substantive client matters.
The program also supports the IRS’s broader modernization efforts. Automating a high-volume, routine process allows the agency to devote more resources to complex cases that require human review, while promoting more consistent and equitable treatment of taxpayers.
Practitioners should be especially vigilant during the transition period in 2026. Because AEP will be phased in, some eligible taxpayers may still receive penalty notices before the system is fully operational for their returns. As a result, practitioners should carefully review any penalty assessments involving 2025 returns or 2026 quarterly returns and should not assume the IRS has automatically applied all available relief. When a taxpayer appears eligible but has not received automatic relief, it may still be necessary to contact the IRS and request penalty abatement.
Reasonable Cause Dilemma
Another important consideration is how the new AEP program interacts with reasonable cause relief. Like FTA, AEP is an administrative waiver based on a taxpayer’s compliance history. Reasonable cause relief, by contrast, is available when a taxpayer can demonstrate that circumstances beyond their control prevented compliance despite exercising ordinary business care and prudence.
Because AEP is applied automatically, the IRS may use it in cases where a taxpayer could have qualified for reasonable cause relief. While this provides immediate penalty relief, it may also consume the taxpayer’s one-time administrative waiver when a stronger statutory basis for relief exists.
For example, a taxpayer who files a return late because of a serious illness may qualify for reasonable cause relief. Under AEP, however, the IRS could automatically suppress the penalty based on the taxpayer’s compliance history. If the same taxpayer later incurs a penalty because of an isolated mistake that does not meet the reasonable cause standard, AEP may no longer be available, resulting in a penalty assessment that might otherwise have been avoided. As a result, practitioners should not assume that automatic relief is always the most advantageous outcome. When a taxpayer has a strong reasonable cause argument, it may be worth pursuing relief on that basis to preserve AEP eligibility for a future year.
Conclusion
The AEP program represents a significant step toward a fairer, more efficient tax system by expanding and streamlining penalty relief for millions of taxpayers. As the IRS implements this new framework, practitioners must remain vigilant in reviewing notices and navigating the interplay between automatic relief and reasonable cause claims to ensure clients receive all available benefits. Tax professionals should take steps now to understand the new rules, update internal procedures, and proactively identify clients who may benefit from this relief so they can maximize opportunities and avoid costly oversights during the transition.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as National Tax Advisory Memo (NTA-2383), first published in Issue 14 Dated July 28, 2026, along with other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bimonthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
