The Internal Revenue Service is retiring one of its oldest customer-service shortcuts and replacing it with something that needs no phone call at all. Penalty relief for a first-time late return or late payment will start showing up on its own, built into the same computer run that processes the return, rather than waiting for someone to ask for it after the fact. During the changeover, though, the fix is not instant for everyone, and the agency has already said so in writing.
Automatic Exemption From Penalty Replaces First Time Abate
The Internal Revenue Service announced the change in IR-2026-83, dated July 8. The new system, called the Automatic Exemption from Penalty, or AEP, is a systemic administrative relief program the agency expects to begin during the summer of 2026. The release states plainly that “AEP provides relief automatically and will replace First Time Abate for eligible returns with original due dates on or after Jan. 1, 2027.” First Time Abate, the decades-old waiver AEP is retiring, required a taxpayer to call the IRS or file a written claim asking to have a penalty removed after it had already been charged.
IRS Chief Executive Officer Frank J. Bisignano framed the shift as a fairness measure rather than a giveaway. “Automatic Exemption from Penalty reflects the IRS’ commitment to making the payment of taxes owed simpler and more consistent,” Bisignano said in the release, adding that “taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.” The agency’s own penalty-relief guidance describes AEP as being applied once the original return finishes processing, replacing the older pattern of assessing a penalty first and requiring someone to dispute it afterward.
Inside the kit: A notice decoder, the refund-trace steps for Form 3911, a refund status tracker spreadsheet and the 3-year refund deadline. Open The IRS Refund Recovery Kit.
Three Years Of On-Time Filing Sets The Bar
To qualify for AEP, a taxpayer needs a timely compliance history: the same return type must have been filed on time for the three prior years, or for 12 consecutive quarters on a quarterly return such as Form 941, and either no penalty was assessed in that stretch or an earlier penalty was later abated for reasonable cause or IRS error. The relief covers individual and business income tax returns — Forms 1040, 1065 and 1120 — along with employment tax returns including Forms 940, 941, 943, 944, 945 and CT-1. It does not extend to returns filed only once or in response to an isolated event, such as an estate or gift tax return, nor to information returns or the daily delinquency penalty charged to some exempt organizations. Business filers face one more condition: the failure-to-deposit penalty cannot have been waived four or more times in the same three-year window, and it cannot have been triggered by an attempt to avoid the Electronic Federal Tax Payment System.
Failure To File, Pay And Deposit Penalties Are Covered — Not Assessed, Not Just Removed
Three penalties fall under AEP: failure to file, failure to pay and failure to deposit. The practical difference from First Time Abate is not just who has to ask — it is whether the penalty exists at all. Under the old system, the IRS assessed a penalty first and removed it only after a taxpayer requested and received First Time Abate, and the failure-to-pay penalty kept accruing on the unpaid balance in the meantime. Under AEP, the agency’s own side-by-side comparison states that no penalty assessment is made at all, and the failure-to-pay penalty does not accrue on the eligible balance in the first place. AEP does not erase the underlying bill: anyone who qualifies still owes any tax and interest due, along with any penalty that falls outside the three covered categories, though interest tied to a penalty is reduced automatically whenever that penalty is reduced.
The Notices That Still Land During The Switchover
The transition is not instantaneous. IR-2026-83 spells out a specific gap: the IRS is phasing out First Time Abate and phasing in AEP during the summer of 2026, and during that changeover, “some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns.” AEP relief is set to begin with 2025 tax-year returns and 2026 quarterly returns, but it only fully replaces First Time Abate for returns whose original due date falls on or after Jan. 1, 2027 — the stretch in between is where a taxpayer who would otherwise qualify for the new automatic relief could still open a notice assessing the very penalty AEP was built to prevent. The IRS’s guidance is direct about what to do in that situation: anyone who believes they should have qualified for AEP but received a notice showing an assessed penalty is told to contact the agency, and a taxpayer may also still request First Time Abate the old way during the overlap, by phone or by filing Form 843, Claim for Refund and Request for Abatement.
What Happens When AEP Doesn’t Apply
Not everyone qualifies. A taxpayer who doesn’t meet the three-year compliance history, or whose return type isn’t eligible for AEP consideration at all, keeps a separate path: penalty relief for reasonable cause. According to the IRS’s reasonable-cause guidance, that request is judged case by case, and accepted explanations include fires, natural disasters, civil disturbances, an inability to get records, or the death, serious illness or unavoidable absence of the taxpayer or an immediate family member. The same guidance is explicit about what does not count on its own: relying on a paid preparer, simple lack of knowledge of a filing deadline, and lack of funds are not, by themselves, reasonable cause for filing or paying late. A taxpayer pursuing that route can call the number printed on the notice or file Form 843, the same form used to request First Time Abate, along with supporting documentation such as hospital records or proof of a natural disaster.
Notices That Arrive Anyway
AEP removes the phone call for a first-time slip-up, but it does not make every IRS letter self-explanatory, and it does not reach a penalty outside its three covered categories or a tax bill that’s still due. A household that opens a notice during the current changeover has no built-in way to tell, from the letter alone, whether it reflects a penalty that should have been waived, a refund complication entirely unrelated to penalties, or something else again.
The IRS Refund Recovery Kit is a 13-page kit built around a notice decoder and the refund-trace steps for Form 3911, alongside a refund status tracker spreadsheet and a plain explanation of the 3-year refund deadline.
See the notice decoder and the refund-trace steps in The IRS Refund Recovery Kit.
AI-assisted research and drafting; reviewed by an editor.
