IRS to automatically waive certain penalties for taxpayers with a history of paying and filing on time

by J. Christian Manalli, Partner, SFBBG

J. Christian Manalli is a partner in the Chicago law firm of Schoenberg Finkel Beederman Bell Glazer LLC. Manalli concentrates his practice on federal tax, estate planning, probate and general business matters. Manalli can be reached at 312- 648-2300, or by email at christian.manalli@sfbbg.com.

Starting this summer, IRS began phasing in a new penalty relief program to automatically provide certain penalty relief to taxpayers who have a strong history of filing returns and paying taxes on time.

For taxpayers who qualify, the following penalties will not be assessed during processing:

• Failure to file.

• Failure to pay.

• Failure to deposit.

The new program, called the Automatic Exemption from Penalty (AEP), will replace the IRS’s First Time Abate program. Unlike the older program, AEP will not require eligible taxpayers to contact the IRS and request relief.

Generally, taxpayers may qualify if they filed and paid on time during the previous three (3) years. For quarterly returns, they must have a timely compliance history covering twelve (12) consecutive quarters. The program applies to eligible original returns beginning with tax year 2025, certain 2026 quarterly returns and future tax periods.

For those who qualify, the IRS will not assess eligible failure-to-file, failure-topay or failure-to-deposit penalties during processing. 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 every return qualifies. Information returns and forms filed because of uncommon events—such as estate and gift tax returns—are generally excluded.

The IRS will phase out First Time Abate during summer 2026. During the transition, some eligible taxpayers may still receive penalty notices. If that happens, they can contact the IRS and ask for First Time Abate. AEP will fully replace that program for eligible returns with original due dates on or after January 1, 2027.

Importantly, AEP does not erase the underlying tax bill or related interest. Taxpayers must still pay any taxes, interest and penalties that are not covered. Those who do not qualify for automatic relief may still ask the IRS to remove penalties if they have a reasonable cause.

More information is available on the IRS administrative penalty relief page. Also, please feel free to contact me if you have any questions regarding this article.