First-time penalty abatement and the IRS Automatic Exemption from Penalty

What changed in 2026?

On July 8, 2026 the IRS announced the Automatic Exemption from Penalty, or AEP, which replaces First Time Abate. Under AEP the IRS checks your history when it processes an original return that was filed or paid late. If its records show timely filing and payment for the three prior years, or 12 consecutive quarters for quarterly returns, the penalty is not assessed, and you receive a notice saying so (CP95 for individuals, CP195B for businesses). No form, call or request is needed.

AEP starts with 2025 tax year returns and 2026 quarterly returns and applies to later periods, for original returns filed within three years of their due date. First Time Abate remains available, on request, for earlier years and periods, and for 2025 and 2026 returns that were processed before AEP started. For original returns due on or after January 1, 2027, First Time Abate is no longer available and AEP takes its place.

Which penalties does the relief cover?

Both forms of relief cover the same three penalties, whatever the amount: failure to file, failure to pay, and failure to deposit for employers. They do not cover accuracy-related penalties, information return penalties, fraud penalties or the estimated tax penalty. Returns that are filed only once or occasionally, such as estate and gift tax returns, are generally not eligible.

Interest on the tax itself is not removed by this relief. The IRS does reduce or remove the interest it charged on a penalty when that penalty is removed. You still owe any unpaid tax, the interest on it, and any penalty the relief does not cover.

What counts as a timely compliance history?

• The same type of return was filed on time for the three prior years, or for 12 consecutive quarters for quarterly returns.
• No penalty was assessed in that period, other than an estimated tax penalty. A penalty that was assessed and later abated for reasonable cause or because of an IRS error does not count against you.
• For businesses, the failure-to-deposit penalty was not waived four or more times in that period, and it was not charged for avoiding the electronic payment system.

The history is checked against IRS records, not your memory, so review the account transcripts before you rely on it. A penalty removed earlier under First Time Abate or AEP does count, so the relief becomes available again only after three more consecutive years of timely filing and payment. A year for which the IRS prepared a substitute return is not treated as compliant.

How do I ask for First Time Abate on an earlier year?

For a year or period that AEP does not cover, you have to contact the IRS. Call the number on the notice, or send a written statement or Form 843. You do not have to name First Time Abate or attach documents: the IRS reviews the account and applies the relief if you qualify. For larger amounts, several periods or a case already in collection, a written request keeps a record. If the penalty was already paid, the request also serves as a refund claim, and it has to be filed within the refund period. When several periods carry penalties, First Time Abate applies only to the earliest one that has three clean years before it, and the others need reasonable cause. If you qualify for both, the IRS applies First Time Abate first.

During the transition, some taxpayers who qualify may still receive a penalty notice for a 2025 tax year return or a 2026 quarterly return. If that happens and your three prior years are clean, contact the IRS and ask for the relief.

What if I do not qualify? Reasonable cause

The second route is reasonable cause: a fire or natural disaster, a serious illness or a death in the immediate family, or being unable to get the records you needed. This route needs facts and dates, in writing, that explain why you could not comply and what you did once you could. Not knowing the rule, being short of money, or relying on someone else to handle your taxes does not generally qualify on its own. A reasonable cause request stands or falls on its documentation, which is why it deserves more than a paragraph. If the IRS denies the request, the decision can be appealed.

Every situation is different and results depend on the facts of each case. This guide is general information, not advice on your file. The complimentary 15-minute introductory call is where your facts come in.