IRS Automatic Penalty Relief Begins in 2026: What to Do If You Still Receive a Penalty Notice

Fusion Legal & Tax · September 28, 2026Practice area6 min readBusiness Tax Prep & Filing

A penalty notice can make an otherwise manageable tax issue feel much heavier. A new IRS process may reduce that burden for taxpayers who have a strong filing and payment history—but “automatic” does not mean every penalty disappears, and it does not mean every IRS notice is wrong.

In a July 8, 2026 announcement introducing Automatic Exemption from Penalty, the IRS said it would begin moving away from First Time Abate during summer 2026. The practical complication is timing: while the new system is being phased in, some taxpayers who may qualify could still receive penalty notices.

Here is how to understand the change, protect your records, and respond without assuming either that the notice must be paid immediately or that the IRS will fix everything on its own.

What is the IRS Automatic Exemption from Penalty program?

Automatic Exemption from Penalty, or AEP, is a new administrative process under which the IRS reviews its records for a taxpayer’s recent compliance history when an eligible original return is processed.

The IRS states that AEP begins in summer 2026 and applies to “eligible original returns beginning with tax year 2025 and 2026 quarterly returns, as well as future tax periods.” To qualify, taxpayers must have a history of timely filing the return and paying any tax due during the prior three years—or the prior 12 consecutive quarters for quarterly returns. The IRS’s detailed administrative-relief page explains how AEP works during return processing.

If the taxpayer and return qualify, the IRS says the following penalties are eligible for relief, regardless of amount:

• Failure to file
• Failure to pay
• Failure to deposit

The central change is procedural. Under First Time Abate, taxpayers generally had to contact the IRS and request relief. Under AEP, qualifying penalties are not assessed during processing, and the IRS sends a notice explaining that relief was applied because of the taxpayer’s timely compliance history.

That can remove an unnecessary request from a taxpayer’s to-do list. It does not, however, remove the need to review correspondence carefully.

Why might an eligible taxpayer still receive a penalty notice?

The IRS is not switching from First Time Abate to AEP all at once. According to its July 2026 AEP transition announcement, the agency will phase out First Time Abate during summer 2026, and “some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns.”

That creates a narrow but important transition issue: a notice may reflect the timing of IRS processing rather than a final determination that the taxpayer cannot receive relief.

If you receive a notice during this period, do not ignore it—but do not assume the penalty is necessarily final. Check:

1. The return and tax period identified in the notice. AEP applies only to eligible returns and periods.
2. The type of penalty. The automatic program covers failure-to-file, failure-to-pay, and failure-to-deposit penalties, not every penalty the IRS can impose.
3. Your prior compliance history. Review whether the same type of return was timely filed and the associated tax was paid for the relevant three-year or 12-quarter lookback period.
4. The IRS’s figures. Compare the notice with your filed returns, payment confirmations, deposit records, extensions, and prior correspondence.
5. The response instructions and deadline. Even when you believe relief should apply, preserve your ability to respond by following the notice carefully.

The IRS says taxpayers who receive an assessed penalty but believe they should have qualified should contact the agency. During the transition, a taxpayer may still be able to request First Time Abate.

When does AEP fully replace First Time Abate?

AEP will replace First Time Abate for eligible returns with original due dates on or after January 1, 2027, according to the IRS announcement describing the phaseout.

Until that transition is complete, the name of the available administrative relief may depend on the return, its original due date, and when the IRS processes the account. The important question is not simply, “Is First Time Abate still available?” It is: Which relief process applies to this specific return and tax period?

Which returns are not generally eligible?

A good compliance history does not make every return eligible for AEP. The IRS says information returns and returns filed only in response to particular transactions or infrequent events generally are not eligible. Its examples include:

• Form 706, U.S. Estate Tax Return; and
• Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

That distinction matters for families completing estate or gift-tax reporting and for businesses dealing with information-return penalties. An automatic exemption should not be assumed merely because the taxpayer has otherwise filed and paid on time.

What AEP does not remove

AEP is penalty relief—not tax-debt forgiveness. The IRS expressly states that taxpayers remain liable for:

• unpaid tax;
• interest;
• penalties that are not subject to AEP; and
• other amounts that remain due.

This is why an AEP confirmation should be reviewed alongside the full account balance. Penalty relief may reduce what is owed, but it may not resolve the underlying tax or payment issue.

If full payment is not currently realistic, the IRS identifies several possible paths, including short- or long-term payment plans, an offer in compromise for taxpayers who qualify, and temporary collection delay in qualifying circumstances. Its tax-debt help page provides a starting point for comparing those options. Most payment plans and relief options require all required tax returns to be filed.

What if you do not qualify for automatic relief?

AEP is not the only possible route. Taxpayers who do not qualify may still request relief based on reasonable cause. The IRS explains that a taxpayer may qualify for penalty relief after trying to comply but being unable to do so because of circumstances beyond the taxpayer’s control.

The IRS directs taxpayers to follow the instructions in the notice. Some requests may be handled by telephone; when relief cannot be approved by phone, a written request using Form 843 may be available. If the IRS denies the request, the notice should identify whether and how the decision can be appealed.

Reasonable-cause relief is fact-specific. A strong request ordinarily requires more than a conclusion that the result feels unfair. The timeline, supporting documents, corrective steps, and connection between the circumstances and the missed obligation all matter.

A practical response checklist

If you receive a federal penalty notice in 2026 or 2027, consider taking these steps before responding:

• Save the complete notice and envelope. The dates and notice number may affect the response process.
• Confirm the return, period, penalty, and amount. Do not assume a notice concerns the most recently filed return.
• Gather the prior three years of relevant returns and payment records. Quarterly filers should review the relevant 12-quarter history.
• Look for an AEP confirmation letter. The IRS says taxpayers who receive automatic relief will be sent an explanation.
• Check whether the return itself is eligible. Some information, estate, gift, and event-driven returns generally fall outside AEP.
• Separate the penalty from the underlying balance. Even if a penalty is removed, tax and interest may remain due.
• Calendar the response date. Do not let a possible relief request become a missed deadline.
• Consider every available basis for relief. Depending on the facts and transition timing, that could include AEP, First Time Abate, reasonable cause, or correction of an IRS account error.
• Keep proof of every submission and conversation. Retain correspondence, fax confirmations, certified-mail records, upload receipts, and call notes.

The larger planning lesson: timely compliance now may preserve relief later

AEP rewards a documented history of filing and paying on time. That makes current compliance especially valuable, even when a prior year is already difficult.

For individuals and businesses, protective next steps can include filing missing returns, reviewing estimated-tax or payroll-deposit procedures, preserving payment confirmations, and addressing IRS notices before they compound. If money is tight, understanding the complete account can help you make a more informed choice between immediate payment, a payment arrangement, and another available resolution path.

Fusion Legal & Tax helps clients understand IRS notices, evaluate penalty-relief options, and see how a tax problem fits into their broader financial picture. We serve Colorado clients and provide federal tax representation nationwide. The right response depends on the particular return, tax period, notice, compliance history, and supporting records; no form of relief is guaranteed.

This article provides general educational information and is not legal or tax advice for any particular person or situation.