The IRS recently established a new automatic process for penalty relief under which eligible taxpayers will receive relief from certain listed penalties without filing a request. The new process replaces the First-Time Abate (FTA) process, which the IRS will begin phasing out this year.

Additionally, the IRS recently ended the Delinquent Foreign Bank and Financial Accounts Report (FBAR) Submission Procedures, which allowed a taxpayer to file late FBARs without penalty if the taxpayer correctly reported all income and paid the tax. For more information on this development, see Tax Alert 2026-1516.

This Tax Alert focuses on the new process for penalty relief.

New penalty relief process

The new Automatic Exemption from Penalty (AEP) process eliminates the need for eligible taxpayers to request penalty relief for certain penalties available for abatement under the former FTA process. Under the AEP, penalty relief is automatically applied during return processing.

Eligible taxpayers are those with a history of timely filing the return and paying the tax due for the previous three years (or 12 consecutive quarters for quarterly filers). If a taxpayer meets the requirements, the IRS will apply AEP and send the taxpayer a notice confirming the relief was granted.

Penalties that will be eligible for the AEP mirror those that are currently eligible under the FTA process. Specifically, the IRS will not assess failure-to-file, failure-to-pay and failure-to-deposit penalties. Many foreign information reporting penalties are not eligible for either AEP or FTA.

The AEP applies beginning with tax year 2025 original returns and 2026 quarterly returns, with full replacement of the FTA process for original returns with due dates on or after January 1, 2027. The IRS has stated that, during the transition period, some taxpayers may continue to receive penalty notices and need to request relief under the FTA process.

Certain returns are not eligible for the AEP process, including information returns and transaction-specific filings, such as estate and gift tax returns. Taxpayers who do not qualify for the AEP process may request penalty relief based on reasonable cause.

Implications

The IRS's decision to automatically abate certain penalties for taxpayers who have a history of timely filing and payment of tax is a welcome administrative reprieve. The FTA process requires taxpayers to formally request abatement, often in writing. The process has often proved cumbersome, as phone wait times and IRS processing times grow longer. However, the IRS has cautioned that taxpayers may still need to apply for abatement under the FTA process, until the IRS has fully implemented the AEP process.