IRS Announces First Time Abate Replacement
The new Automatic Exemption from Penalty (AEP) process starts in summer 2026
The IRS’s First Time Abate (FTA) has provided taxpayers with automatic, no-questions-asked penalty relief for more than a decade if they meet the criteria; however, its flaw is that the taxpayer or their tax professional had to know to request it. Taxpayers often paid eligible penalties simply because they did not know about FTA.
The new Automatic Exemption from Penalty (AEP) is a much-needed simplification of the FTA process, and helps taxpayers who lack professional tax assistance.
AEP rules are located on an IRS webpage; the FTA rules are in Internal Revenue Manual (IRM) 20.1.1.3.3.2.1 (3-29-2023).
AEP vs. FTA Timing
AEP applies to all eligible 2025 tax year returns and 2026 quarterly returns, and to all future tax years and quarters. FTA applies to all eligible 2025 tax year returns and 2026 quarterly returns to which AEP was not applied, plus all prior years and periods.
FTA will no longer apply to eligible returns with original due dates on or after January 1, 2027; however, it can still be used for prior tax periods if applicable.
AEP Overview
The following penalties are eligible for both AEP and FTA:
Failure to file under §6651(a)(1), §6698(a)(1) [partnerships], or §6699(a)(1) [S corporations],
Failure to pay under §6651(a)(2) or §6651(a)(3), and
Failure to deposit under §6656.
A taxpayer qualifies for AEP if they file an eligible, original return late, or pay the tax late, and IRS records show a history of timely compliance over the prior three years (or 12 consecutive quarters). This lookback period is the same one used for FTA.
AEP is essentially the same as FTA, with the main difference that AEP is applied automatically, whereas the taxpayer or their representative must request FTA.
No “First Time” Issue
With respect to FTA, the IRM implied that it was available only once per taxpayer (i.e., “first time”). IRM 20.1.1.3.3.2.1(2) (3-29-2023) states:
…is available for penalty relief the first time a taxpayer is subject to one or more of the referenced penalties…
However, the criteria did not require IRS employees to conduct compliance reviews beyond the prior three tax years; the language was overall unclear.
AEP is clear: it is available multiple times per taxpayer if they meet the criteria.
Tax Practitioner Role in AEP
It is guaranteed that the IRS will mistakenly assess AEP-eligible penalties. Tax practitioners will still need to verify that AEP was properly applied, and request it on behalf of taxpayers if penalties are erroneously assessed.
Join the Conversation
If you are a paid subscriber, you can talk about this topic in the comments section. Please keep the discussion related to this edition’s topic.