IRS Ditches the Penalty Request Form: What the New Automatic Exemption from Penalty Means If You Filed or Paid Late

On July 8, 2026, the IRS announced a significant change to how it handles late-filing and late-payment penalties: a new program called the Automatic Exemption from Penalty, or AEP, that removes the need for millions of taxpayers to call the IRS or fill out a form just to get relief they already qualified for. If you have a clean compliance record and slipped up once, here is what you need to know.

What Is the Automatic Exemption from Penalty?

For years, if the IRS charged you a penalty but you had a strong filing and payment history, your best option was something called First Time Abate (FTA). The catch was that you had to ask for it. You had to call the IRS or submit Form 843, know the program existed, and make your case. Most people never did, either because they did not know relief was available or the process felt too daunting.

AEP fixes that. The IRS’s new Automatic Exemption from Penalty program replaces the long-standing First Time Abate administrative waiver, automatically suppressing certain penalties for eligible taxpayers without requiring a phone call, written request, or Form 843 submission. The relief is built into return processing itself.

When a return is processed, the system automatically evaluates the taxpayer’s compliance history and suppresses qualifying penalties without any taxpayer action. Qualified taxpayers will receive a letter explaining that although they filed or paid late, penalties were not assessed due to their compliance history.

One important detail: AEP does not eliminate the underlying tax liability or statutory interest. It only prevents the assessment of qualifying penalties and penalty-related interest. You still owe any unpaid tax and any interest that has accrued. AEP simply keeps the additional penalty charge from being stacked on top.

Which Penalties Does AEP Cover?

Qualified taxpayers can receive relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties under AEP. In plain terms, that covers the three most common penalties people face when they file a return late, do not pay what they owe by the deadline, or miss a payroll tax deposit.

The IRS lists these return series as eligible for AEP: Forms 1040, 1065, and 1120, as well as Forms 940, 941, 943, 944, 945, and Form CT-1. Not all returns are eligible. For example, information returns and transaction-specific returns such as Form 706 (U.S. Estate Tax Return) or Form 709 (Gift Tax Return) are not eligible for AEP.

There is also a meaningful difference from the old system in how and when penalties are handled. Under First Time Abate, the penalty was assessed first and then removed after the taxpayer requested relief. Under AEP, no penalty is assessed at all, so it never accrues. That is a real benefit: you never see the charge on your account and penalty-related interest does not have a chance to build.

Who Qualifies?

The eligibility standard is straightforward, though the IRS is the one who checks it against your account, not you.

Taxpayers qualify if they have a history of timely filing the return and paying any tax due in the three prior years, or 12 consecutive quarters for quarterly returns. The IRS checks that the same return type was filed on time across that period and that no disqualifying penalties were assessed during the lookback window. Estimated tax penalties do not disqualify you, and neither does a penalty that was later abated for reasonable cause or IRS error.

AEP is intended to help eligible taxpayers who generally meet their filing, payment, and deposit obligations on time but have a one-time compliance issue. If you have been responsible for years and had one difficult tax year, this program was designed with you in mind.

Keep in mind that eligibility is determined by the IRS from your account history. Whether you may qualify depends on your specific circumstances, and the IRS makes the final determination during processing.

When Does AEP Take Effect, and What Happens During the Transition?

AEP applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, as well as future tax periods, and covers failure-to-file, failure-to-pay, and failure-to-deposit penalties. AEP provides relief automatically and will replace First Time Abate for eligible returns with original due dates on or after January 1, 2027.

The rollout is phased, and that matters if you are expecting relief right now. The IRS will begin phasing out First Time Abate and transitioning to AEP during the summer of 2026. During this transition, some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns.

The most important point during the rollout: do not ignore an IRS notice because relief is supposed to be automatic. If you get a penalty notice and AEP was not applied, that is not the end of the road.

Got a penalty notice during the transition period?

Taxpayers who believe they qualify may contact the IRS to request First Time Abate. That old process is still available through the transition. Do not let a deadline on the notice slip by while you wait to see if the system corrects itself. Respond to any IRS notice by the date it specifies.

What If You Do Not Qualify for AEP?

AEP is not the only path to penalty relief, and not qualifying for it does not mean you are out of options.

Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause. The IRS will review those requests and notify taxpayers of the outcome. Reasonable cause applies in situations where circumstances genuinely outside your control prevented you from filing or paying on time, things like a serious illness, a natural disaster, or circumstances that made compliance impossible despite your best efforts. Each case is evaluated individually.

This change is especially important for low-income taxpayers and taxpayers who cannot afford representation. But no matter your income level, if you are carrying a larger tax problem, such as years of unfiled returns, a balance you cannot afford to pay, or active IRS collections activity, a penalty waiver alone may not address the full picture.

What You Should Do Now

Here is a practical checklist based on what has been announced.

• Check your notices carefully. If you filed a 2025 Form 1040 or a 2026 quarterly employment tax return late and have a clean three-year history, look for a confirmation letter from the IRS stating that penalties were not assessed. That is your signal AEP was applied.
• Do not assume the system caught it. If you received a penalty notice for an eligible return and period and no AEP letter arrived, the transition may have caused a gap. Contact the IRS promptly and ask about First Time Abate. Note any response deadline printed on your notice and do not miss it.
• Remember what AEP does not cover. Your underlying tax balance and any accrued interest remain due. AEP removes the penalty surcharge, not the debt itself.
• Explore reasonable cause if AEP does not apply to you. If your compliance history does not meet the three-year lookback, or your return type is not on the eligible list, reasonable cause relief may still be available depending on your circumstances.
• Talk to a tax professional if your situation is more complex. Penalty relief is one tool. If you are facing multiple years of unfiled returns, a balance you cannot realistically pay, liens, levies, or other collection actions, you may benefit from a broader resolution strategy.

At Clear Start Tax, we work with individuals and businesses who are behind on filing, carrying IRS balances they cannot manage, or facing enforcement. AEP is welcome news for many taxpayers, and we can help you understand whether you may qualify, how to respond if you received a notice, and what other relief options could apply to your situation. A confidential consultation costs nothing and could point you in the right direction.