Internal Revenue Service, IR-2026-83, July 8, 2026

The Internal Revenue Service is implementing a significant procedural evolution regarding administrative penalty relief. The agency is transitioning from the traditional First Time Abate (FTA) procedure to a new systemic program titled "Automatic Exemption from Penalty" (AEP). This transition is expected to begin in the summer of 2026. Unlike the current FTA method, where "taxpayers must contact the IRS to request relief" via a written statement or Form 843, the AEP is a "systemic administrative relief program" that requires "no taxpayer action." Under the new framework, if a taxpayer is eligible, the IRS will apply the relief automatically upon the completion of the original return's processing and "issue a notice confirming that the relief was granted."

Strategic Rationale for Automation

The move toward automation is driven by a desire to streamline tax administration and enhance the taxpayer experience. According to IRS Chief Executive Officer Frank J. Bisignano, "Automatic Exemption from Penalty reflects the IRS’ commitment to making the payment of taxes owed simpler and more consistent." The agency aims to reduce the administrative friction for compliant taxpayers, noting that "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." Ultimately, "The IRS is making this change to promote fairness and consistency in the application of penalty relief while encouraging voluntary compliance."

Technical Scope and Statutory Application

The AEP program is targeted toward specific filing types and is governed by established statutory frameworks. The relief is applicable to several key return series, including Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and Form CT-1. This relief specifically mitigates penalties associated with:

Failure to File: Applicable under IRC § 6651(a)(1) for individuals, IRC § 6698(a)(1) for partnerships, and IRC § 6699(a)(1) for S corporations.
Failure to Pay: Applicable under IRC § 6651(a)(2) regarding tax not paid by the due date, and IRC § 6651(a)(3) regarding tax not paid by the date stated in a notice or demand.
Failure to Deposit: Applicable under IRC § 6656.

It is important to note that AEP is not a universal remedy. The relief excludes "information returns and returns that are filed only in response to specific transactions or infrequent events," such as Form 706 (U.S. Estate Tax Return) and Form 709 (Gift Tax Return). Additionally, the "Daily Delinquency Penalty (DDP)" and "information reporting dependent on another filing" are expressly excluded from this relief.

Distinctions Between FTA and AEP

For practitioners, the distinction between the legacy FTA and the new AEP is critical for managing client expectations and tax liability. Under the FTA, "penalty is assessed first, then later removed," and the relief may continue to accrue interest until the tax is fully paid. Conversely, under AEP, "no penalty assessment is made," meaning the penalty does not accrue. While FTA is a request-based mechanism, AEP is integrated into the processing system. Furthermore, while AEP applies to "2025 tax year returns, and subsequent 2026 quarterly returns, and all future tax years/quarters," the FTA remains relevant during the transition period. During this window, "some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns," necessitating manual requests for FTA if the system has not yet transitioned.

Compliance Nuances and Business Requirements

Eligibility for AEP is contingent upon a "history of timely compliance," defined as having the "same return type, as the original return, was timely filed for the prior three years (or 12 consecutive quarters)." For business taxpayers, additional scrutiny is applied. To qualify, "the IRS did not waive the failure to deposit penalty four or more times during the prior three years (or 12 consecutive quarters)," and the penalty "was not charged for Electronic Federal Tax Payment System (EFTPS) avoidance." Taxpayers who fall outside these parameters may still seek relief, but they must do so through the standard "reasonable cause" channels, where "the IRS will review those requests and notify taxpayers of the outcome."

Prepared with assistance from LM Studio google/gemma-4-26b-a4b-qat.