Most taxpayers don’t plan to get hit with an IRS penalty. Usually, it happens because life got in the way: a bill was missed, a return was filed late, or an estimated payment did not get made on time. For years, one of the best forms of relief in that situation was an IRS program called “first-time penalty abatement,” often called FTA. If you had a strong compliance history, you or your tax professional could ask the IRS to remove certain penalties without having to prove a disaster, illness, or other special hardship.
That process is changing. The IRS has announced that it will begin automatically forgiving certain penalties for taxpayers who have not had a similar penalty in the past three years*, rather than requiring them or their tax preparer to request relief. The IRS says the change is meant to simplify the process and make penalty relief more consistent and more accessible for eligible taxpayers.
For taxpayers, this is good news. It means some common penalty problems may be resolved without extra paperwork. But it also means it is important to understand what the new rule does, who it helps, when it starts, and what it does not cover.
*For others, generally a business, that are required to file quarterly returns, the look-back period to determine if the new automatic forgiveness program is 12 consecutive quarters of timely filing.
What Is The New Automatic Exemption From Penalty?
The new program, often called Automatic Exemption from Penalty or AEP, is the IRS’s move toward automatic relief. Under the new approach, the IRS will automatically forgive certain penalties for taxpayers who file, deposit, or pay late, as long as they have not had a similar penalty in the prior three years.
That is a meaningful shift. Under the old system, the taxpayer had to request relief. Under the new system, the IRS is trying to apply relief on its own when the taxpayer qualifies.
In plain English, this means the IRS is saying: if you have a clean enough recent compliance history and you missed a deadline once, we may not make you go through a formal abatement request to get the penalty removed.
The IRS also says the change is intended to streamline the process and improve equitable access to relief for eligible taxpayers. For taxpayers, that should translate into fewer phone calls and letters to the IRS, and fewer cases where a penalty sits on the account simply because nobody requested abatement. From the IRS’ perspective, the new procedure should free up IRS personnel to provide better customer service to taxpayers with other issues.
Who Qualifies?
The main qualification is a recent history of compliance. According to the IRS announcement, taxpayers qualify if they have not incurred a similar penalty in the prior three years.
That three-year lookback is the key idea behind both the old FTA system and the new automatic system. The IRS wants to reserve this relief for taxpayers who are generally compliant and who simply had one isolated problem.
The IRS has also described the rule in practical terms: it applies to taxpayers who file, deposit, or pay late, provided they have not had a similar penalty in the past three years.
So, if you are a taxpayer who has been on time for several years and then miss one deadline, this new system is designed with you in mind.
What Kinds of Penalties Are Covered?
The IRS announcement focuses on the most common “timing” penalties:
- failure to file,
- failure to pay, and
- failure to deposit.
These are the penalties most taxpayers think about when they hear “IRS penalty.” If you file late, pay late, or miss a required deposit, the IRS may assess one of these penalties. Under the new automatic approach, qualified taxpayers should receive relief without having a separate abatement request filed.
That said, taxpayers should not assume every IRS penalty is covered. The new rule is aimed at the standard late filing, late payment, and late deposit situations. Other kinds of penalties may still require a separate explanation or a different kind of relief.
When Does It Start?
The IRS’s announcement about the new procedure implies that it will begin by applying the AEP to tax year 2025 individual returns “starting this summer.” Generally, these would be returns on extension that are due October 15. (That means taxpayers should not expect currently existing penalty issues from previously filed returns to automatically vanish.) The IRS is rolling out a new system, and we all know how any new system can have glitches, so taxpayers will need to watch for how it is applied in practice during the transition.
What Will It Not Apply To?
This is where taxpayers need to slow down and read carefully. The new automatic exemption is not a universal penalty pass.
The IRS’s announcement says the relief is for taxpayers who file, deposit, or pay late and meet the compliance-history test. But many tax forms and tax situations have their own separate penalty rules and procedures.
For example, estate and gift tax returns are not the same as a regular individual income tax return. Form 706 is the estate tax return used to figure the tax on the value of a decedent’s estate. Form 709 is the gift tax return, and its instructions state that late filing and late payment penalties apply unless there is reasonable cause.
In other words, even if the new automatic rule helps with many routine penalties, taxpayers and their tax preparers filing estate or gift tax returns still need to pay close attention to those separate rules.
Another important point: if you do not qualify for automatic relief, the IRS still allows reasonable-cause relief in the appropriate situations. That matters because not every late filing is a first-time issue. Sometimes a taxpayer is late because of a serious event, a medical problem, a death in the family, or another circumstance that can support a reasonable-cause request. Your tax preparer can assist you in requesting reasonable cause relief.
What Should You Do if You Receive a Penalty Notice?
Even with the new automatic rule, do not ignore an IRS notice. Here is the practical taxpayer checklist:
- Contact this Office Immediately: Don’t procrastinate; some notices are time sensitive and bad things can happen if not responded to timely.
- Determine the Type of Penalty Being Assessed: This office will identify what kind of penalty the IRS assessed and determine what action may need to be taken.
- Don’t Automatically Assume the IRS Got It Right: Even automatic systems can make mistakes. If a penalty remains on your account when you think you qualify, it is worth having this office review any correspondence from the IRS before taking any action. That way ensuring the response is appropriate.
Examples
Suppose you filed your return late this year because you were traveling and forgot to send it in. You have filed and paid on time for the last several years, and you have no similar penalty in the prior three years. Under the IRS’s new automatic system, that kind of taxpayer is exactly the sort of person the rule is designed to help. However, during the transition period, the new automatic relief may not apply and correspondence with the IRS may be required.
Now suppose the return is a Form 709 gift tax return and you receive a late filing penalty notice. In that situation, you may still need to rely on the rules in the Form 709 instructions, which say late filing and late payment penalties apply unless there is reasonable cause.
Those two examples show the difference between a routine timing penalty and a return with special rules.
The Bottom Line
The IRS is moving from a request-based relief system to an automatic one for certain penalty situations. Taxpayers who file, deposit, or pay late may receive automatic penalty relief if they have not had a similar penalty in the prior three years. The IRS says the goal is to streamline the process and improve access to relief for eligible taxpayers.
For taxpayers, that is a welcome change. It means fewer formal requests, less paperwork, and a better chance that a one-time mistake will be treated like a one-time mistake. But it is still important to understand the limits. The new rule does not apply to every penalty situation and some returns continue to have their own penalty and reasonable-cause rules.
If you receive a penalty notice or any correspondence from the IRS that you don’t understand, do not panic. Contact this office immediately.
