For years, first-time penalty abatement (FTA) has been the most reliable and most underused form of IRS penalty relief. Taxpayers with a clean three-year compliance history could get failure-to-file, failure-to-pay, or failure-to-deposit penalties waived, but only if they knew to ask. Starting in the summer of 2026, that changes. The IRS is rolling out Automatic Exemption from Penalty (AEP), a system that grants the same relief without any request from the taxpayer.
The move toward automatic relief reflects a broader effort by the IRS to make penalty relief less dependent on a taxpayer knowing to ask for it. When you’re facing IRS penalties, talk to the CPAs at East Coast Tax Consulting Group about your options for relief.
Key Takeaways
- AEP replaces the request-based FTA process starting summer 2026, applying automatically to eligible 2025 tax year returns and 2026 quarterly returns, and to all subsequent periods.
- Eligibility is unchanged: three years (or 12 consecutive quarters) of timely filing, with no assessed penalties in that window other than an estimated tax penalty, or a penalty that was later abated for reasonable cause or IRS error.
- Coverage is limited to Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1, and only to failure-to-file, failure-to-pay, and failure-to-deposit penalties.
- AEP is not retroactive. Penalties assessed on pre-2025 tax years or pre-2026 quarters still require a manual FTA request under the existing process.
- Business taxpayers face added conditions — no more than three failure-to-deposit waivers in the lookback period, and no penalty tied to EFTPS avoidance.
- Interest tied to an abated or exempted penalty is removed automatically, but interest on the underlying tax balance is unaffected.
- Taxpayers who don’t qualify for FTA or AEP can still pursue reasonable cause relief, which is determined by documented facts rather than compliance history.
What First-Time Abate Has Always Required
FTA has never been a right; it is a discretionary administrative waiver the IRS extends to taxpayers with an otherwise strong compliance record. To qualify, a taxpayer has needed to show:
- The same return type as the one now being penalized was filed on time for each of the prior three years.
- No penalty (other than the estimated tax penalty) was assessed during that period or, if one was assessed, it was later abated for reasonable cause or IRS error.
- For business filers, there is an additional requirement that there were no more than three failure-to-deposit penalty waivers in the prior three years or 12 quarters, and no penalty tied to avoiding the Electronic Federal Tax Payment System (EFTPS).
Under this system, the taxpayer or their representative has to affirmatively request relief by phone, using the number listed on the notice, or in writing via Form 843, Claim for Refund and Request for Abatement. The IRS doesn’t proactively flag eligibility; it simply confirms it once asked. That gap between eligibility and awareness prevents many qualifying taxpayers, often those with the least capacity to navigate the IRS, from receiving the relief they are entitled to.
The Shift to Automatic Exemption from Penalty
AEP eliminates the request step entirely. If a taxpayer files or pays late in the current year but has a documented history of timely filing and payment for the prior three years (or 12 consecutive quarters), the applicable penalty simply won’t be assessed in the first place. There’s no waiver of an existing penalty because the penalty never posts to the account.
AEP applies at the point an eligible original return completes processing. If IRS records show the requisite compliance history, the system suppresses the failure-to-file, failure-to-pay, or failure-to-deposit penalty automatically and issues a notice explaining that relief was applied. No follow-up action is required from the taxpayer. If a penalty is assessed despite an apparent AEP-qualifying history, the taxpayer (or their representative) should contact the IRS, since that outcome likely reflects a processing gap rather than an actual disqualification.
AEP applies to a defined set of return series: Forms 1040, 1065, and 1120 for income tax; Forms 940, 941, 943, 944, and 945 for employment tax; and Form CT-1. Coverage begins with 2025 tax year returns and 2026 quarterly returns, and continues for all subsequent years and quarters. It is not retroactive; penalties already assessed on earlier years remain subject to the existing manual FTA request process, not AEP.
Why the IRS Made This Change
The penalties AEP covers exist to encourage compliance, not to punish taxpayers who otherwise follow the rules but slip up once. FTA was built around that same idea, but its request-based design worked against it. A taxpayer had to know the program existed and how to access it. Getting relief they already qualified for meant sitting through long IRS phone wait times or filing Form 843.
That gap between eligibility and uptake turned out to be substantial. The Taxpayer Advocate Service has pushed for years to make FTA automatic, citing exactly this problem. When the IRS granted first-time abatement to roughly 200,000 taxpayers in 2021, the Taxpayer Advocate Service estimated that as many as 4.5 million taxpayers would have qualified had the relief applied automatically.
In practice, two taxpayers in essentially the same position could see very different outcomes, one because they happened to know to ask, the other because they didn’t.
Moving to AEP addresses that problem directly, and it isn’t purely a taxpayer-facing fix. Automating eligibility also reduces the volume of penalty-abatement calls and written requests the IRS has to process manually, freeing staff time that could be utilized elsewhere.
Which Penalties Are Covered
The penalties eligible for relief under either FTA or AEP are the same three categories:
- Failure to file — applies when individual, corporate, partnership, and S corporation returns aren’t filed by the due date..
- Failure to pay — applies when tax shown on the return isn’t paid by the due date, or when tax required to be shown wasn’t paid by the date specified in a notice or demand.
- Failure to deposit —applies when deposits aren’t made in the correct amount, within the prescribed period, or in the required manner.
Accuracy-related penalties, civil fraud penalties, and the estimated tax penalty are outside the scope of both FTA and AEP. A taxpayer facing one of those exposures needs a different relief strategy, possibly reasonable cause.
FTA and AEP Side by Side
The practical differences between the outgoing and incoming systems are significant, even though the eligibility test is unchanged:
| Feature | First Time Abate (FTA) | Automatic Exemption from Penalty (AEP) |
|---|---|---|
| How relief is granted | Not automatic — taxpayer must request it | Automatic |
| Action required | Contact the IRS by phone, written statement, or Form 843 | None |
| Timing of relief | Penalty is assessed first, then removed | No penalty is assessed at all |
| Failure-to-pay accrual | May continue accruing until the balance is paid in full | Does not accrue on the exempted penalty |
| Applicable returns | 2025 tax year and 2026 quarterly returns, plus all prior periods | 2025 tax year and 2026 quarterly returns, and all future periods |
The failure-to-pay distinction is worth flagging for clients currently working through a balance-due situation. Under the old FTA framework, the penalty accrues in real time even while a request for abatement is pending, which can inflate the balance before relief catches up. Under AEP, if the taxpayer’s compliance history qualifies, that accrual never starts.
Interest Still Follows the Penalty
AEP doesn’t change how interest is treated. Interest continues to accrue on any unpaid tax and, where applicable, on assessed penalties, until the balance is paid in full. But if a penalty is abated or was never assessed under AEP, any interest tied specifically to that penalty is reduced or removed automatically. The taxpayer doesn’t need to submit a separate request for the interest component. Interest on the underlying tax liability itself is not affected by penalty relief and generally can’t be abated except in narrow circumstances involving erroneous written advice from the IRS.
What Happens If a Taxpayer Doesn’t Qualify
Taxpayers who don’t meet the compliance-history threshold for either FTA or AEP aren’t without options. Reasonable cause relief remains available and doesn’t depend on a clean three-year record. It requires the taxpayer to show that the failure to file, pay, or deposit resulted from circumstances beyond their control, such as a serious illness, a natural disaster, reliance on erroneous professional or IRS advice, or a comparable event. That showing must also demonstrate that the taxpayer otherwise exercised ordinary business care and prudence. Reasonable cause determinations are fact-specific and require documentation, unlike the largely mechanical FTA/AEP compliance-history check.
Considerations for the Transition Period
Because AEP doesn’t take effect until summer 2026 and only applies going forward, there’s a transition window where you need to run both playbooks. A 2025 return filed late in early 2026, before AEP is up and running, may still need an affirmative FTA request even though the same return would clear automatically later in the year. Older tax years and quarters are permanently outside AEP’s reach and will always require a manual abatement request by phone or Form 843 regardless of when that request is made.
It’s also worth remembering that AEP doesn’t expand who qualifies for penalty relief. It only removes the procedural burden of asking. A taxpayer who wouldn’t have qualified for FTA under the old rules because of a penalty in the lookback period that was never abated, or a business with a spotty deposit history , still won’t qualify under AEP.
Contact East Coast Tax Consulting Group for Tax Penalty Assistance
Our qualified tax professionals can evaluate your eligibility for penalty abatement and help you with phone or mail abatement requests if automated relief doesn’t work for you.
The tax resolution specialists at East Coast Tax Consulting Group have helped taxpayers through a wide range of situations, including penalty abatement, unfiled returns, levies, liens, and mounting tax debt. We’ll help you understand your options and find the answer that is right for you. Call us today at 561-826-9303 for a FREE consultation.
Frequently Asked Questions
What’s new about FTA in 2026?
Starting in 2026, taxpayers who qualify for FTA automatically receive the abatement from the IRS. The program is called Automatic Exemption From Penalty. Previously, tax professionals and taxpayers had to write or call the IRS to request the waiver. This applies to penalties assessed on tax years beginning 2025 and later.
Which penalties qualify for first-time abatement?
The failure-to-file penalty, failure-to-pay penalty, and failure-to-deposit penalty will be abated if the required qualifications are met.
Do underpayment/estimated tax penalties count against my clean history?
No. If you incurred penalties for underpaying estimated tax in previous years, the IRS does not take those into account when evaluating FTA eligibility. However, estimated tax penalties themselves generally aren’t eligible for FTA relief.
Does FTA cover accuracy-related penalties (like the 20% negligence penalty)?
No. FTA applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. It does not cover the accuracy-related penalty for negligence or substantial understatement, which comes under a separate section of the tax code. Relief from that penalty typically requires showing reasonable cause or that you acted in good faith.
What’s the difference between AEP/FTA and reasonable cause relief?
AEP/FTA is largely objective. It functions as a bright-line test where all three eligibility requirements can be verified through IRS account systems, which is why decisions are often made on the spot. Reasonable cause, by contrast, involves a subjective review of your specific circumstances (illness, disaster, etc.) rather than a clean compliance-history check, and can apply even when you don’t meet the three-year lookback requirement.