As the National Taxpayer Advocate, I recommend changes to the IRS that will improve tax administration and better protect taxpayer rights. Some changes are complex, some are technical, and some take years of persistent advocacy before taxpayers see the benefit.
Today, the IRS announced one such change that has been a long time in the making, and one that I am especially grateful to see: It is introducing the Automatic Exemption from Penalty (AEP)program, which will provide penalty relief automatically to many eligible taxpayers rather than requiring them to request relief.
The IRS’s implementation of AEP is a major taxpayer win. It will help hundreds of thousands of taxpayers, reduce unnecessary burden, and conserve IRS resources.
For years, too many eligible taxpayers missed out on first-time penalty relief simply because they did not know it was available, did not understand how to request it, could not get through to the IRS, or did not have a tax professional advising them. That is especially true for low-income taxpayers and taxpayers who cannot afford representation. A penalty that may seem modest to some taxpayers can be financially significant for a taxpayer struggling to pay rent, utilities, groceries, transportation, or medical expenses.
AEP helps fix that problem. When taxpayers meet the requirements, the IRS will automatically provide relief from certain penalties instead of requiring taxpayers to request it. Relief should not depend on a taxpayer’s income, ability to reach the IRS by phone, or access to professional representation.
This is the kind of commonsense improvement that makes tax administration more efficient, more consistent, and more taxpayer friendly. It also advances important taxpayer rights, including the rights to quality service, to pay no more than the correct amount of tax, and to a fair and just tax system.
Penalty Relief Can Promote Compliance and Fairness
Penalties play an important role in our tax system. They encourage taxpayers to file returns, pay taxes, and make required deposits on time. But penalties must be administered fairly and consistently, and taxpayers should receive relief when the facts and circumstances warrant it. Congress has long recognized that penalty relief is appropriate in certain circumstances. For example, taxpayers may qualify for reasonable cause relief when they exercised ordinary care and prudence but were unable to comply because of circumstances beyond their control.
The IRS has also provided administrative relief through First Time Abate (FTA) for otherwise-compliant taxpayers who made a mistake. FTA has generally been available for certain failure-to-file, failure-to-pay, and failure-to-deposit penalties when taxpayers had a clean compliance history for the prior three years.
The problem was not the concept of FTA. The problem was the process.
Relief was available, but taxpayers generally had to ask for it. That meant relief often depended on whether a taxpayer:
- Knew what to ask for;
- Had access to professional help; or
- Could reach the IRS.
Many taxpayers who qualified likely paid penalties they could have avoided.
For years, the Taxpayer Advocate Service (TAS) has recommended that the IRS apply this relief automatically. Doing so reaches more eligible taxpayers, reduces unnecessary phone calls and correspondence, and allows IRS employees to focus on issues that require human judgment. I appreciate that the IRS has now taken this important step.
AEP Is a Significant Step Forward
Under AEP, the IRS is largely retaining the core eligibility principles of FTA but changing how the relief is delivered. Instead of waiting for taxpayers to request relief, the IRS will automatically identify eligible taxpayers and suppress the assessment of certain penalties when they meet the requirements.
Generally, taxpayers qualify for AEP if they have timely filed required returns and paid any tax due for the prior three years. For quarterly returns, taxpayers generally must have a timely compliance history for the prior 12 consecutive quarters. AEP applies during original return processing.
For eligible individual taxpayers, AEP prevents failure-to-file and failure-to-pay penalties from being assessed. For eligible business taxpayers, AEP prevents failure-to-file, failure-to-pay, and failure-to-deposit penalties from being assessed.
That is a meaningful improvement for taxpayers and the IRS.
Taxpayers benefit because they receive relief without having to navigate another administrative process. The IRS benefits because it should receive fewer phone calls, fewer written requests, and fewer manual penalty abatement cases.
This is the kind of modernization that can improve taxpayer service while freeing IRS employees to assist taxpayers with issues that require direct attention.
AEP also should prevent repeated taxpayer contacts for the same tax period. Under FTA, a taxpayer could receive relief, later have additional tax assessed, and then need to contact the IRS again to request additional penalty relief. Under AEP, once the IRS grants relief for an eligible tax period, the IRS should not subsequently assess covered penalties for that same tax period, even if the tax is not fully paid or additional tax is later assessed.
The impact should be significant. In fiscal year 2025, nearly 220,000 taxpayers received FTA relief through the manual process. TAS estimates that if AEP had been in place for the same period, over 1.5 million taxpayers would have received penalty relief – about seven times as many. That means many more taxpayers would have received relief without having to ask for it.
This is good government in action. It reduces burden, improves consistency, and helps ensure similarly situated taxpayers are treated the same, regardless of whether they are able to reach the IRS or have a representative call on their behalf.
How the IRS Will Roll Out AEP
On July 8, 2026, the IRS announced it will begin phasing in AEP for penalties associated with 2025 tax year returns and 2026 quarterly returns. In 2027, AEP is expected to apply more broadly to 2026 returns. For eligible original returns with due dates on or after January 1, 2027, AEP will replace FTA.
When AEP applies, the IRS will send taxpayers a notice explaining that the penalty was not assessed because of their timely compliance history. Taxpayers who receive an AEP notice do not need to contact the IRS or respond to the notice. Taxpayers should understand that FTA will continue to apply to prior-year returns and to certain returns processed before AEP is implemented. For those returns, if taxpayers receive a penalty notice but do not receive a notice informing them that AEP has been applied, they can contact the IRS and request penalty relief if they believe they qualify.
Not all returns or penalties qualify for AEP. For example, returns filed only for certain transactions or infrequent events, such as Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, generally are not eligible. AEP also does not eliminate the taxpayer’s obligation to pay tax, interest, or penalties that are not eligible for this relief.
What Should Taxpayers Do If They Receive a Penalty Notice?
Taxpayers should not ignore an IRS notice assessing a failure-to-file, failure-to-pay, or failure-to-deposit penalty. If you receive a penalty notice for a 2025 tax year return and you did not receive a separate notice explaining that AEP was applied, review the notice carefully.
If you believe the penalty is wrong or that you qualify for relief, call the IRS at the toll-free number listed on the notice and request penalty relief. Depending on the facts, you may qualify for FTA, AEP, reasonable cause relief, or another form of penalty relief.
During the transition to AEP, some taxpayers with eligible 2025 tax year returns or 2026 quarterly returns may still receive penalty notices if their returns were processed before AEP was available. If you believe you are entitled to penalty relief, call the IRS and inquire whether AEP, FTA, or reasonable cause would be appropriate.
When you call, have the following information available:
- The IRS notice or letter;
- The penalty you want relieved, such as failure to file, failure to pay, or failure to deposit;
- The tax year or tax period;
- The reason you believe the penalty should be removed (i.e., you believe you qualify for FTA or AEP because you have a compliant filing history, or your unique facts and circumstances support reasonable cause relief); and
- If you are requesting reasonable cause relief, you’ll need to have any available documentation that supports your request.
If the IRS cannot resolve the request by phone, you may need to submit a written request or Form 843, Claim for Refund and Request for Abatement. If the IRS denies your request, review the denial letter carefully because it may explain your appeal rights.
The important point is this: If you receive a penalty notice and believe the penalty is incorrect or that you qualify for relief, do not assume the IRS has already considered all available options. Contact the IRS and ask.
The IRS Should Preserve Reasonable Cause Relief
Although AEP is a major improvement, one important problem remains.
As with FTA, AEP may be applied before the IRS considers whether the taxpayer qualifies for reasonable cause relief. That matters because reasonable cause relief is grounded in statute and applies when the taxpayer’s facts and circumstances justify relief. AEP, like FTA, however, is an administrative waiver.
When a taxpayer qualifies for reasonable cause relief, the IRS should apply reasonable cause relief instead of using AEP. Otherwise, the taxpayer will lose the benefit of AEP in a future year when reasonable cause is not available.
For example:
Year 1: Taxpayer X filed late because of circumstances that support reasonable cause relief. The IRS automatically applies AEP and suppresses the penalty.
Year 3: Taxpayer X files late again. This time, the taxpayer does not qualify for reasonable cause relief but would have qualified for AEP if it had not been used in Year 1.
In this scenario, the taxpayer loses access to administrative relief in Year 3 because AEP was used in Year 1, even though the taxpayer may have been entitled to reasonable cause relief in Year 1. That result is unfair and undermines the purpose of both forms of relief.
For years, TAS has urged the IRS to fix this problem. The IRS should not allow an administrative waiver to displace relief Congress specifically provided by law. Taxpayers who qualify for reasonable cause relief should be able to receive that relief without sacrificing future access to AEP.
Before implementation, IRS leadership had agreed in writing on an approach that would preserve reasonable cause relief while still allowing the IRS to provide automatic penalty relief. Unfortunately, the IRS changed course and created an approach under which administrative relief will displace reasonable cause relief.
I understand the IRS’s concern that considering reasonable cause may require additional resources. But administrative efficiency should not override taxpayer rights, particularly rights and protections grounded in the Internal Revenue Code. This inequity tarnishes what is otherwise a significant improvement to the IRS’s penalty relief program.
A Strong First Step – and an Opportunity to Finish the Job
The implementation of AEP is a significant accomplishment. The IRS deserves credit for taking this step, and many taxpayers will benefit from it. TAS has recommended automatic penalty relief for years, and this change reflects meaningful progress through the Annual Report to Congress recommendation process.
As the old saying goes, we should not let perfect be the enemy of the good. AEP is good.
It will:
- Provide relief to hundreds of thousands of taxpayers;
- Reduce unnecessary contacts with the IRS; and
- Allow IRS employees to focus on work that requires judgment and direct assistance.
But the IRS should not stop here; it should meet its commitments. To fully protect taxpayer rights, the IRS should address the interaction between AEP and reasonable cause relief in a later phase of implementation. Doing so would make an already strong program even better and would ensure taxpayers receive the most appropriate relief based on their facts and circumstances.
The IRS should also consider applying AEP retroactively to eligible taxpayers who received failure-to-file, failure-to-pay, or failure-to-deposit penalties in 2026 before AEP was fully implemented. Taxpayers should not be disadvantaged simply because their returns were processed before the automated relief was available.
Recommendations
- Allow reasonable cause relief to be substituted for AEP when the taxpayer’s facts and circumstances support reasonable cause relief.
- Retroactively apply AEP to eligible taxpayers who received a failure-to-file, failure-to-pay, or failure-to-deposit penalty in 2026 before AEP implementation.
- IRS should create a robust FAQ page for taxpayers to understand the AEP process.
Conclusion
AEP is a long-awaited and welcome taxpayer win.
By automatically providing penalty relief to eligible taxpayers, the IRS will reduce taxpayer burden, conserve agency resources, and help ensure taxpayers are not penalized when they have demonstrated a history of timely compliance.
This change will also make the tax system fairer. It will help taxpayers who do not know relief exists, cannot afford representation, or are unable to reach the IRS by phone. Taxpayers should not lose relief simply because they did not know they had to ask for it.
At the same time, the IRS should continue refining AEP to protect taxpayers who qualify for reasonable cause relief. Taxpayers should not lose future access to administrative penalty relief merely because the IRS automatically applied AEP in a year when reasonable cause relief was warranted.
The bottom line: AEP is a major step forward for taxpayers and tax administration. I appreciate the IRS taking this important step and believe taxpayers will see meaningful benefits. With additional refinement, AEP can become an even stronger example of how the IRS can improve efficiency, reduce burden, and protect taxpayers’ right to a fair and just tax system.
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