First Time Abate Is Being Replaced in 2027: What the New Automatic Exemption from Penalty Means Before the Switch

The IRS announced on July 8, 2026 that it is replacing a long-standing penalty relief program called First Time Abate with a new system called the Automatic Exemption from Penalty, or AEP. For returns with original due dates on or after January 1, 2027, the old program is gone. But right now, during the transition, some taxpayers who qualify for relief are still getting penalty notices in the mail and have no idea they can fight back. If you owe the IRS and have received a notice recently, this change directly affects you.

What Is First Time Abate, and Why Is It Going Away?

The most common administrative penalty waiver provided by the IRS, First Time Abate (FTA), applies to taxpayers with three years of timely compliance history. In plain terms: if you had a clean record for three years and then slipped up once, the IRS would agree to remove certain penalties. The catch was that taxpayers or their tax professionals 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 fixes exactly that problem. If you have filed and paid on time for the last three years and then slip once, the IRS will now waive the penalty on its own, with no phone call and no form to file. The new program, called AEP, was announced by the IRS in IR-2026-83 on July 8, 2026. As IRS CEO Frank J. Bisignano stated, “taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.”

The January 1, 2027 Deadline You Need to Know

AEP will fully replace First Time Abate for eligible returns with original due dates on or after January 1, 2027. That is the hard cutoff. Before that date, you are in a transition period that works differently for different tax years and return types.

AEP phases in during the summer of 2026, covers eligible original returns starting with tax year 2025 and 2026 quarterly returns, and fully replaces FTA for returns with original due dates on or after January 1, 2027. If you filed a 2024 annual return or an earlier quarterly return, FTA still matters for eligible 2024 tax year returns, eligible 2025 quarterly returns, and eligible 2025 and 2026 returns processed before AEP was live for that return type.

The takeaway: the year printed on your IRS notice determines which program applies to you, and confusing the two could mean leaving penalty relief on the table.

The Transition Trap: Why You May Still Owe a Penalty You Should Not

This is the part that catches people off guard. The IRS began 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.

Because implementation is occurring in stages, an otherwise eligible taxpayer may still receive a penalty notice for a 2025 return or 2026 quarterly filing. Depending on when the return is processed, the IRS may not automatically apply AEP during the transition period. If a penalty is assessed, taxpayers who believe they qualify should consider requesting First Time Abate rather than assuming the IRS will correct the issue automatically.

In other words, do not assume the problem will fix itself. Do not ignore an IRS notice because relief is supposed to be automatic. If you receive a penalty notice during the transition period, you still have a path. You have to contact the IRS to request FTA because it is not applied automatically. You can call the number on your notice or file Form 843, Claim for Refund and Request for Abatement.

Who May Qualify, and What AEP Does and Does Not Cover

Taxpayers qualify if they have a history of filing on time and paying any tax due in the previous three years, or 12 consecutive quarters for quarterly returns. The IRS checks your compliance history automatically during return processing and either does or does not assess the penalty from the start.

Covered return series include Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. For individual filers, that means your standard personal income tax return is in scope. For eligible individual taxpayers, AEP covers two penalties: failure to file, charged when you do not submit your tax return by the deadline, and failure to pay, charged when you do not pay the tax you owe by the due date. Businesses may also qualify for relief from failure-to-deposit penalties on payroll taxes.

There are real limits, though. While AEP prevents the assessment of certain penalties, taxpayers must still pay any tax and interest due, as well as any penalties not eligible for relief. Put simply, AEP is not a way out of paying what you owe. It only removes the surcharge on top of it. AEP does not eliminate penalties, does not apply to every taxpayer, and does not apply to every type of penalty.

Certain penalties fall completely outside the program. AEP does not cover fraud-related penalties, the Daily Delinquency Penalty, returns filed once or infrequently, or information reporting dependent on another filing. The IRS explains that information returns and returns filed only because of specific transactions or infrequent events generally are not covered. Examples include Form 706, U.S. Estate Tax Return.

A Note on Interest

AEP may prevent a failure-to-pay penalty, but you must still pay the underlying tax. Interest will continue to accrue until the balance is paid. One small upside: the IRS will automatically reduce or remove the interest related to a penalty if any of your penalties are reduced or removed.

What Happens If You Do Not Qualify for AEP?

Not everyone will qualify. AEP only helps taxpayers who have not had penalty problems before. If you already owe back taxes, have missed filings in recent years, or are watching penalties and interest pile up month after month, this automatic program likely will not apply to you.

That does not mean you are out of options. You can still request penalty relief based on reasonable cause if circumstances outside your control caused the late filing or payment, such as serious illness, a natural disaster, or an inability to obtain records. The IRS reviews those requests and notifies you of the outcome. Beyond reasonable cause, the IRS also offers programs such as installment agreements, Currently Not Collectible status, and Offer in Compromise for taxpayers dealing with larger balances, depending on your circumstances. Taxpayers may also appeal an adverse penalty relief decision.

The key point is this: owing the IRS does not mean you are stuck with every charge on your notice. Options exist, but most of them require you to act, not wait.

What You Should Do Right Now

The rules changed in mid-2026 and they change again on January 1, 2027. If you have received an IRS penalty notice for a 2024 or 2025 return, or for any quarterly return filed in 2025 or 2026, do not set it aside. The deadline printed on that notice is real.

Here is a practical checklist:

• Read the notice carefully. Note the return type, the tax period, the penalty type, and the response deadline. That information determines which relief program applies.
• Check your filing and payment history. Did you file and pay on time for the three years before the year on the notice? If yes, you may qualify for FTA (for returns processed before AEP applied) or AEP going forward.
• Do not assume automatic relief was applied. During the transition period, it may not have been. Call the number on the notice. Request FTA or other applicable relief. If phone resolution fails, Form 843 remains the written path.
• Ask about reasonable cause if you do not qualify for FTA or AEP. Job loss, illness, a family emergency, or a natural disaster may support a reasonable cause request.
• Do not ignore the notice. Penalties and interest grow over time. The sooner you respond, the fewer compounding charges you face.

If the IRS situation on your account is more complicated than a single penalty notice, whether that means unfiled returns, a growing balance, or collection activity, the stakes are higher and the rules are more layered than any single program can address. That is where professional guidance matters.

At Clear Start Tax, we work with individuals and businesses who are behind on filing, facing IRS notices, or carrying tax debt they are not sure how to resolve. We review your full tax situation and help you understand which options may be available to you, depending on your circumstances. Reach out today for a consultation and find out where you actually stand.