For years, the way an otherwise punctual taxpayer got out of a late-filing penalty was to write a letter. You called the number on the notice, or you mailed a written statement or a Form 843, and you asked the IRS to look at your record and take the penalty back off. The penalty was charged first and removed later, and if you never asked, it simply stayed. That letter is being retired.
Automatic Exemption from Penalty is what replaces the request
The IRS is phasing out First Time Abate, the long-standing waiver for taxpayers with a clean compliance record, and replacing it with a systemic program called Automatic Exemption from Penalty, or AEP. The difference is procedural rather than generous. The same kind of taxpayer qualifies for the same kind of break, but now the agency applies it during processing instead of waiting to be asked.
In the release announcing the change, IRS Chief Executive Officer Frank J. Bisignano framed it as a matter of consistency: “taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.” The agency’s own instruction to taxpayers is that they do not need to take action. If you qualify, the penalty is never assessed, and the IRS sends a notice telling you the relief was applied.
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Three prior years, or twelve quarters, decide it
The eligibility test is a look backward at your own record. You qualify if the same type of return was filed on time for the three prior years, or the twelve consecutive prior quarters if you file quarterly, and if either no penalty was assessed in that stretch or a penalty was assessed and later removed for reasonable cause or IRS error. The estimated tax penalty does not count against you.
Not every return is in scope. The relief covers the ordinary annual and payroll filings, including Forms 1040, 1065 and 1120 and the 940, 941, 943, 944 and 945 series, plus Form CT-1. Returns you file once or rarely are excluded, which is why an estate tax return on Form 706 or a gift tax return on Form 709 does not qualify, and neither do information returns. Businesses face two extra tests: the failure to deposit penalty must not have been waived four or more times in the lookback period, and it must not have been charged for avoiding the electronic payment system.
Three penalties that never get assessed
Three specific penalties are covered, and the dollars behind them are not small. The failure to file penalty runs 5% of the tax due for each month or partial month a return is late, capped at 25%, and if the return is more than 60 days late the minimum penalty for a Form 1040 due after December 31, 2025 is $525, or 100% of the underpayment if that is less. The failure to pay penalty is 0.5% of unpaid tax per month or partial month, also capped at 25%, dropping to 0.25% while an approved payment plan is in force and rising to 1% once the IRS has sent an intent to levy and ten days have passed. The failure to deposit penalty rounds out the list for employers.
One difference between the old process and the new one is worth more than the paperwork savings. Under First Time Abate, the penalty was assessed and then removed, and in the meantime the failure to pay penalty could keep accruing until the tax was fully paid. Under the automatic version, the IRS’s own comparison says no assessment is made at all, and the failure to pay penalty does not accrue on the unpaid tax.
The tax and the interest are still yours to pay
None of this forgives what you actually owe. The agency states plainly that while the automatic exemption prevents the assessment of certain penalties, taxpayers must still pay any tax and interest due, along with any penalties that are not eligible for relief. Interest is charged on penalties, and by law the IRS cannot remove or reduce interest unless the underlying penalty is removed or reduced. In the automatic version, where the penalty is never assessed in the first place, there is no penalty interest to accrue on it.
If your record does not clear the three-year test, the older path is still open. You can request relief on reasonable cause grounds, which asks the IRS to weigh the circumstances behind the late filing or payment rather than your compliance history, and the agency reviews the request and tells you the outcome.
First Time Abate does not disappear until January 1, 2027
The changeover is gradual, and there is a gap worth knowing about. The IRS has said the automatic relief begins in the summer of 2026 and applies to eligible original returns starting with tax year 2025 and 2026 quarterly returns. During the transition, some taxpayers who would qualify may still receive a penalty notice for one of those returns. The agency’s guidance in that situation is to contact it and request First Time Abate, meaning the old letter still has one job left to do while the new system catches up.
The date that ends the overlap is on the IRS’s administrative penalty relief page, which lays the two programs side by side: the automatic exemption replaces First Time Abate for eligible returns with original due dates on or after January 1, 2027. After that, relief that was once a phone call and a written request becomes something the IRS applies to your account without hearing from you at all, and the notice in your mailbox says so.
This article was produced with AI assistance and reviewed by a human editor. Figures are linked to their primary sources; where a claim could not be verified from the public record, we say so.
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