IRS Implements New Automatic Exemption From Penalty Program

 Posted on July 21, 2026 in Taxation Law

The penalties that the IRS may assess when taxpayers fail to file tax returns or pay taxes on time can make a difficult situation even worse. These violations may occur because taxpayers have encountered financial problems or other issues, and the requirement to pay penalties on top of the taxes that are owed may not seem possible. Fortunately, the IRS offers relief from penalties in certain situations, and some recent changes to its policies may allow for automatic penalty exemptions in some cases.

While some taxpayers may qualify for automatic penalty relief, others may need to apply for relief, provide explanations to the IRS for why they failed to meet their legal requirements, or show that violations did not occur. A lawyer with experience in tax law and IRS procedures can provide guidance on the options for penalty abatement that may be available while ensuring that taxpayers take the right steps to minimize their financial losses.

What Is the Automatic Exemption From Penalty Program?

The IRS may assess penalties when taxpayers do not file tax returns on time or do not pay taxes that are owed. In the past, certain taxpayers could apply for relief from these penalties through a program known as First Time Abate (FTA). This required taxpayers to contact the IRS and seek relief, typically through a written request. Requests may have required weeks or months of processing time before a taxpayer received an answer on whether relief would be granted. 

The IRS is looking to streamline this process through a new program known as Automatic Exemption from Penalty (AEP). When processing tax returns, the IRS will determine whether a person meets the criteria for relief from penalties, and it will automatically apply exemptions for eligible taxpayers. These exemptions may apply to failure-to-file penalties in which taxpayers file tax returns late, failure-to-pay penalties in which taxpayers have not paid the full taxes owed by the applicable due dates, or failure-to-deposit penalties in which taxpayers have not deposited taxes in the correct amount or within the proper time periods. 

A taxpayer will generally be eligible for an automatic exemption from penalties if they have filed tax returns and paid taxes as required during the 3 previous years. Taxpayers who pay estimated taxes quarterly must have filed all returns and paid all taxes as required during the previous 12 quarters. Business taxpayers must have deposited taxes correctly during the previous 3 years or 12 quarters, and they must not have received waivers of any penalties during that period. 

AEP will apply to tax returns for the 2025 tax year and quarterly returns for 2026 that had not been processed prior to the beginning of the program in July 2026. It will also apply to any future tax years or quarters. For previous tax years and returns processed prior to the beginning of the program, FTA may still be available. However, FTA will no longer be available for any returns with due dates of January 1, 2027 or later.

Other Options for Relief From Tax Penalties

While the AEP program is meant to streamline the process of penalty relief for eligible taxpayers, there are some penalties that are not covered under this program, and some taxpayers may not qualify for automatic exemptions. In these cases, taxpayers will need to understand what other forms of relief may be available. 

In certain circumstances, taxpayers may apply for penalty relief based on reasonable cause. They may take steps to show that they had a valid reason for failing to file tax returns or pay taxes as required. Reasonable causes may include natural disasters, serious illnesses, or other circumstances that prevented taxpayers from meeting their legal requirements. In other cases, taxpayers may be able to appeal penalties that have been assessed.

Contact Our San Jose, CA Tax Penalty Abatement Lawyer

While automatic exemptions may apply to certain taxpayers and prevent penalties from being assessed, others may need to take action to address penalties or resolve tax controversies. At John D. Teter Law Offices, our San Jose tax attorney can provide guidance on the options that are available, make sure the right steps are taken to request relief or file appeals, and advocate for solutions that will help a taxpayer minimize their losses. Contact our firm today at 408-866-1810 to discuss these issues in a consultation and get legal help with tax penalties, audits, or appeals.