For decades, some tax advisors viewed First-Time Abate (FTA) relief as a one-time administrative benefit — valuable enough that some taxpayers intentionally chose not to use it for relatively small penalties in order to preserve it for a more significant issue later. That strategy may soon disappear.
In a significant administrative shift, the IRS announced that it will begin automatically granting penalty relief to qualifying taxpayers with a strong compliance history. The new Automatic Exemption from Penalty (AEP) program will gradually replace the familiar FTA process, eliminating the need for many taxpayers to request relief that they likely would have received anyway.
Historically, taxpayers who qualified for FTA were required to contact the IRS and request penalty removal. As a result, compliant taxpayers often received penalty notices before navigating a separate administrative process to obtain relief. The new AEP program is intended to eliminate that extra step.
The change should simplify the process for many eligible taxpayers, but it may have an unintended consequence for some. Because FTA was generally viewed as a one-time administrative benefit, some taxpayers strategically declined to seek relief for minor penalties, preferring to reserve the option for a future year when the stakes might be higher. An automatic relief system removes that flexibility.
Under the new framework, eligible taxpayers generally must demonstrate timely filing and payment compliance during the prior three-year period (or twelve quarters for employment tax filers). If those requirements are satisfied, certain filing, payment and deposit penalties may be automatically removed during return processing without any request from the taxpayer.
The rollout is expected to begin in 2026 and will apply to eligible 2025 returns, certain quarterly filings and future tax periods. Not all returns will qualify. The IRS has indicated that certain specialized filings, including estate and gift tax returns, generally fall outside the program’s scope. Taxpayers who do not qualify may still seek penalty relief based on reasonable cause.
From a practical perspective, the new process should reduce unnecessary correspondence between taxpayers and the IRS and streamline the penalty relief process for eligible taxpayers. The change also reflects a long-standing recommendation by the Taxpayer Advocate Service to make first-time penalty relief automatically available to qualifying taxpayers.
If you receive an IRS penalty notice or have questions about whether you may qualify for AEP, First Time Abate or reasonable cause relief, contact a Withum tax professional to evaluate your options.
For more information on this topic, please contact a member of our team.
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