IRS Introduces New Automatic Exemption from Penalty (AEP) Program

Earlier this month, the IRS announced a new automatic process to provide penalty relief for certain individual and business taxpayers with a good record of filing returns and paying on time. The new automatic exemption from penalty (AEP) program replaces the First Time Abatement waiver which provided relief for failure-to-file, failure-to-pay and failure-to-deposit penalties. This change will provide relief for many Central New York companies by eliminating unexpected penalties, delays in exemption application, and will result in less involvement from third parties to resolve issues. The changes are expected to be fully implemented by the end of summer 2026. To help clients, prospects, and others Dermody, Burke & Brown, CPAs, LLC has provided a summary of the key details below.

Program Details

The new program applies to 2025 tax year returns, for 2026 returns filed on a quarterly basis, and all future tax years/quarters. To be eligible a taxpayer must demonstrate a history of timely filing returns and payment for the prior three years (and no penalty was assessed or abated). For companies, the IRS must not have waived the failure-to-deposit penalties four or more times during this period. The penalty must not have been charged for Electronic Federal Tax Payment (EFTPS) avoidance. Eligible taxpayers will not be subject to the failure-to-file, failure-to-pay, and failure-to-deposit penalties.

Since the program is automatic, those eligible do not need to apply to the IRS to obtain relief. Once applied, the agency will send a note that AEP relief was granted. It is important to note that not all returns are eligible. For example, information returns and those related to specific transactions or infrequent events such as an estate or gift tax return are generally ineligible.

It is important to note that while AEP can prevent penalty assessment, under no circumstances does it erase any tax bills. In fact, taxpayers are responsible for taxes owed, interest and other penalties which fall outside the program.

Key Consideration

One of the drawbacks of the program is once the relief is used it is not available again until another 3 years of clean compliance has been achieved. Given there are other ways to obtain relief, taxpayers may want to evaluate alternatives such as reasonable cause relief. This would allow them to still receive relief while keeping the AEP option available for any future penalty not eligible for a reasonable cause claim. If necessary, taxpayers can contact the IRS to remove AEP relief, but this decision should be made in consultation with an experienced tax advisor.

Contact Us

No individual or business wants to receive penalties and assessments from the IRS. The good news is the new program provides a way to automatically receive penalty relief. However, it is essential to be aware of all the options and determine the right path to resolution for your specific situation. If you have questions about the information outlined above or need assistance with another tax or accounting issue, DB&B can help. For additional information call 315-471-9171 or click here to contact us. We look forward to speaking with you soon.