From the official announcement by IRS ↗
The Internal Revenue Service (IRS) has just announced a completely new penalty relief mechanism called Automatic Exemption from Penalty (AEP), replacing the long-standing First Time Abatement (FTA) program. According to an explanation from accounting industry publication journalofaccountancy.com, AEP will automatically eliminate the three most common penalty types: failure-to-file penalties, failure-to-pay penalties, and failure-to-deposit penalties, applying to taxpayers with a good compliance history.
To qualify for automatic relief, taxpayers must have filed on time and paid taxes in full for the three consecutive years prior, or twelve consecutive quarters for quarterly filers. Once qualified, taxpayers need do nothing: the IRS will apply the relief automatically and send a confirmation notice of the penalty waiver. This mechanism takes effect this summer for 2025 tax returns and 2026 quarterly filings, then expands to future tax periods. By January 1, 2027, AEP will completely replace FTA.
The clearest beneficiaries are those who rarely miss deadlines but encounter a single mishap—for instance, nail salon owners, small restaurant operators, or elderly individuals unfamiliar with English or unaware of how to request penalty relief through the old formal process. Previously, information about FTA existed only in IRS internal documents, not in law or formal regulations, so many eligible taxpayers never knew they could apply.
It should be noted that information returns or filings submitted for isolated transactions—such as property tax or gift tax returns—do not fall within the scope of automatic relief. Taxpayers who do not meet AEP requirements can still seek relief on reasonable cause grounds through the old method, and even when a penalty is waived, the taxpayer must still pay the full tax and any accrued interest.
This is not the only recent change from the IRS. Under Executive Order 14247, the IRS will stop issuing paper tax refund checks after September 30, 2025, shifting gradually to electronic payments. For older tax debts, the Fresh Start program—which raised the threshold for asset seizure liens to $10,000—remains an option for those owing $50,000 or less who want flexible installment plans. At the same time, a lawsuit called Kwong vs. United States is also opening the possibility of refunding penalties and interest to certain individuals affected by the COVID-19 pandemic period. See the official IRS announcement at the source link below.
Taxpayers who have filed on time for years no longer have to submit an application requesting penalty relief.
Analysis
This change responds to a gap that has existed for years: first-time penalty relief was already available but existed only in internal documents, causing those unfamiliar with procedures or without their own accountant to miss out on their rightful benefit. In fiscal year 2025, only about 220,000 people received penalty relief through the manual process, while the IRS estimates that if AEP had been in place, the number could have reached over 1.5 million people. This is also a follow-up to a March letter from the American Institute of Certified Public Accountants (AICPA) requesting an expansion of penalty relief eligibility. In the same week, another federal agency—the CMS—also announced a final rule updating the hospice payment framework for fiscal year 2027, showing that numerous federal administrative changes are occurring in parallel, extending well beyond the tax sector alone.
Diaspora Impact
Most qualifying taxpayers need do nothing—the IRS will apply the relief automatically and send a confirmation notice. However, during the transition period, some 2025 and 2026 filings may still receive erroneous penalty notices; if this occurs, the taxpayer should contact the IRS directly to request first-time penalty relief. Nail salon owners, small restaurant operators, and self-employed individuals should keep their tax returns from the past three years to prove compliance history if needed. Anyone unsure whether they have old tax debt or were penalized during the COVID-19 pandemic period should check their tax transcript copy through IRS.gov, not through unofficial third-party services.