IRS Penalty Relief Is Changing in 2026: What Taxpayers Need to Know
Filed your tax return late? Paid your taxes late? Or thought a tax payment was scheduled, only to discover later that it never went through?
That can lead to IRS penalties.
The good news is that taxpayers who normally file and pay on time may qualify for penalty relief. And starting in 2026, the IRS is making that relief easier.
The new program is called Automatic Exemption from Penalty (AEP).
What Is Changing?
For years, the IRS offered First Time Abate (FTA) to qualifying taxpayers with a good compliance history.
The biggest problem with FTA was that you had to ask for it.
The process generally worked like this:
FTA: The IRS assesses the penalty → you contact the IRS and request relief → the IRS removes the penalty if you qualify.
With the new system:
AEP: The IRS checks your compliance history automatically → if you qualify, the covered penalty is not assessed.
You generally don’t need to call the IRS, file a form, or request the relief.
When Does AEP Start?
The IRS began rolling out AEP in summer 2026.
It starts with eligible:
2025 tax-year returns
2026 quarterly returns
Later eligible returns and periods
AEP applies to several common individual and business return series, including Forms 1040, 1065, 1120, 940, 941, 943, 944, 945 and CT-1.
There is a transition period, however.
FTA can still apply to eligible:
2024 tax-year returns
2025 quarterly returns
2025 tax-year returns processed before AEP started
2026 quarterly returns processed before AEP started
For eligible original returns with original due dates on or after January 1, 2027, AEP replaces FTA.
Who Can Qualify?
The basic idea is simple:
You normally follow the tax rules, but something went wrong this time.
Generally, the IRS looks at whether you filed the same type of return on time and paid your taxes for the previous three years.
For quarterly filers, the IRS generally looks at the previous 12 consecutive quarters.
Your penalty history also matters. Generally, you must have had no prior penalties during that period, other than estimated tax penalties, or a prior penalty must have been removed because of reasonable cause or IRS error.
Additional requirements apply to certain business taxpayers.
What Penalties Can AEP Cover?
AEP can provide relief from certain:
Failure-to-file penalties
Failure-to-pay penalties
Failure-to-deposit penalties
But AEP does not cover every IRS penalty.
For example, it generally does not cover accuracy-related penalties, information-return penalties, Daily Delinquency Penalties, or certain returns that are filed only occasionally.
You Still Owe the Tax and Interest
This is important.
AEP is penalty relief. It does not erase your tax bill.
You are still responsible for:
Tax you owe
Interest on unpaid tax
Other penalties that don’t qualify for AEP
You should still file, pay and make required tax deposits on time.
One Important Advantage of AEP
AEP can be particularly helpful when you owe tax.
Under FTA, a failure-to-pay penalty could continue to grow until the tax was fully paid, even if that penalty was later removed after FTA was granted.
Under AEP, if you qualify, the covered failure-to-pay penalty does not accrue and is not assessed on the unpaid tax.
Interest on the unpaid tax can still continue.
What If You Don’t Qualify for AEP?
You may still have another option.
The IRS may remove certain penalties for reasonable cause.
This is different from AEP. The IRS looks at your specific situation and why you were unable to file, pay or make a required deposit on time.
Reasonable cause is decided case by case.
So, not qualifying for AEP does not automatically mean you have to accept the penalty.
Received an IRS Penalty Notice? Don’t Automatically Pay It
This is the most important practical takeaway.
If you receive an IRS penalty notice, don’t ignore it—but don’t automatically assume the penalty is correct either.
Send the notice to your tax professional.
A professional can review:
Should AEP have applied?
Is FTA still available?
Could you qualify for reasonable-cause relief?
Was the penalty calculated correctly?
What tax, penalties and interest do you actually owe?
The IRS specifically says that taxpayers who receive a penalty notice but believe they should have qualified for AEP should contact the IRS.
If you receive a notice saying the IRS did apply AEP, keep that notice too and share it with your tax professional.
The Bottom Line
The new system makes first-time penalty relief easier:
FTA = You have to ask for relief.
AEP = The IRS automatically checks whether you qualify.
But AEP does not apply to every taxpayer, return or penalty.
If you receive an IRS penalty or penalty-relief notice, send it to your tax professional before taking action. There may be relief available, and it is worth making sure the IRS handled your account correctly.
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