IRS automatic penalty relief replaces First Time Abate: what it covers

What the Automatic Exemption from Penalty is

Until now, a business owner with a clean record who filed or paid late once could call the IRS and ask for First Time Abate. The penalty was assessed first and removed later, and only if you asked.

AEP turns that around. In IR-2026-83 (July 8, 2026), the IRS said it will stop assessing three penalties during processing for taxpayers with a history of filing and paying on time. No request, form or phone call is needed. When it applies, the IRS sends a notice saying the penalty was not assessed because of your record. The IRS said the program was expected to begin in summer 2026.

Its fact sheet (FS-2026-12) adds the line to keep in mind: AEP "does not eliminate penalties under the law." It is meant for someone who usually files, pays and deposits on time and has a one-time slip.

Which penalties AEP skips

Only these three, whatever the amount:

The clean history test: three years or 12 quarters

You qualify when, for the same type of return as the late one:

• It was filed on time, with any tax due paid, for the prior three years, or the prior 12 consecutive quarters for a quarterly return such as Form 941.
• No penalty was assessed in that window, or one was assessed and later removed for reasonable cause or IRS error. An estimated tax penalty does not count against you.

Businesses face two more conditions. The IRS must not have waived a failure to deposit penalty four or more times in the window, and no failure to deposit penalty can have been charged for avoiding the Electronic Federal Tax Payment System (EFTPS).

The test runs by type of return. A spotless payroll record does nothing for a late partnership return.

Which returns and tax years AEP covers

The eligible return series are Forms 1040, 1065 and 1120; Forms 940, 941, 943, 944 and 945; and Form CT-1.

The IRS has warned that during the switch, some taxpayers who qualify may still get penalty notices for 2025 returns and 2026 quarterly returns. If that happens to you, call the number on the notice and ask for First Time Abate, or send Form 843.

Not eligible: information returns (W-2s and 1099s), returns filed once or for a single event (such as Form 706 for an estate or Form 709 for gifts), the daily delinquency penalty, and information reporting that depends on another filing.

What AEP does not forgive

• The tax. You still owe every dollar of it.
• Interest on the tax. It runs from the due date until you pay. For Oct 1 to Dec 31, 2026, the IRS rate on individual underpayments is 7% a year, compounded daily.
• Other penalties. Accuracy-related penalties, information return penalties and anything else not in the table above. Late 1099s are information returns, so moving to IRIS on time matters as much as ever.
• The estimated tax penalty. It is not on the AEP list, and the IRS says reasonable cause does not apply to it either. Our estimated tax guide covers the dates.

What AEP does remove is the penalty and the interest that would have run on it. The IRS also says that under AEP, the failure to pay penalty is not assessed and does not accrue on unpaid tax, while interest on that tax keeps running.

A worked example: a late return, then a late deposit

Say a sole proprietor with three years of on-time Form 1040s files the 2026 return seven weeks late and pays the $8,000 balance with it. Seven weeks is two months or part months. When both penalties apply in a month, the IRS cuts the failure to file rate from 5% to 4.5% and adds 0.5% for failure to pay.

With the clean history, AEP means neither penalty is assessed. Interest on the $8,000 from the due date to the day it was paid is still owed.

Now say the same owner's business makes a $6,000 payroll tax deposit for December 2026 eight days late. The failure to deposit penalty for a deposit 6 to 15 days late is 5%: $6,000 x 5% = $300. December falls in a 2026 quarter, so if the 12 prior quarters of Form 941 are clean, AEP skips the $300.

Here is the catch. AEP stops the penalty; it does not change the date the return came in. The IRS test for the next return asks whether the same type of return was filed on time for each of the three prior years, and the IRS describes AEP as help with a one-time compliance issue. Plan on it once, not as a habit.

The mistakes that will still cost money

• Counting on it twice in three years. The IRS built AEP for a one-time slip, and its test looks for on-time returns in each of the three prior years.
• Assuming it covers everything. A late W-2 or 1099 is an information return and gets no automatic relief.
• Ignoring a notice during the transition. A penalty on a 2025 return may still need a First Time Abate request.
• Missing payroll deposits as a habit. Four waived failure to deposit penalties in the window disqualify a business.
• Filing late because you cannot pay. Failure to file runs at 5% a month, ten times the 0.5% failure to pay rate, and filing on time is the history AEP looks for.

What to do next, in order

1. File on time even if you cannot pay in full. Then pay what you can and ask the IRS about a payment plan.
2. Put every payroll tax deposit date on a calendar from your deposit schedule, and reconcile the bank account that pays them each month. In BooksGPT's bank reconciliation, you tick the lines each statement cleared and finish at a $0.00 difference, so a deposit that never cleared stands out.
3. Read every IRS notice. An AEP notice needs no reply. A penalty notice for a 2025 return or a 2026 quarter may still need a First Time Abate request.
4. If you do not qualify, and something outside your control caused the delay (a fire or natural disaster, a serious illness, records you could not get), request relief for reasonable cause. The IRS says lack of funds alone, mistakes and relying on a tax professional generally do not qualify.
5. Keep the next three years clean. That is what earns relief for the next slip.