First Time Penalty Abatement IRS (FTA) and Automatic Exemption From Penalty (AEP): 2026–2027 Changes Explained

If you just received an IRS penalty notice, you're probably wondering whether you can get those penalties removed-and what the new rules mean for you. This guide breaks down the first time penalty abatement IRS program, the incoming Automatic Exemption from Penalty system, and exactly what steps to take in 2026 and 2027.

Fast answer: Can I get my IRS penalties removed with First Time Abatement?

Yes, many taxpayers can remove IRS penalties through first time penalty abatement if they have a clean three-year compliance history and meet current filing and payment rules. FTA is an administrative waiver the IRS has offered since 2001, and it remains one of the most straightforward forms of IRS penalty relief available today.

FTA can remove failure to file, failure to pay, and failure to deposit penalties for one tax period. You do not need to prove reasonable cause-just a clean record, filed tax returns, and paid or arranged tax debt. FTA applies to failure-to-file and failure-to-pay penalties on income returns and failure to deposit penalties on payroll tax returns.

For returns with due dates before January 1, 2027, you can still request FTA. But starting with 2025 individual returns processed in summer 2026, the IRS is phasing in the Automatic Exemption from Penalty program, which will automatically provide penalty relief for qualifying taxpayers without requiring a separate abatement request. FTA will be automatically applied starting in 2026 for eligible returns.

A successful FTA application does not erase underlying tax debt or standard interest on the tax. Interest tied to any abated IRS penalty is reduced or removed, but your core tax obligation and most interest remain due.

At ClearNotice, we help taxpayers understand IRS notices about penalties, deadlines, and exactly how to request IRS penalty abatement-so you can take the right action quickly instead of guessing.

Overview: IRS penalties, FTA, and the new Automatic Exemption from Penalty (AEP)

IRS penalties are charges the government adds when you miss tax deadlines or underpay what you owe. Most individuals encounter a late filing penalty, a failure to pay penalty, or accuracy related penalties when they file or pay late or report incorrect amounts. Paying taxes on time and filing correctly prevents most of these charges-but life happens.

IRS first time penalty abatement is an administrative waiver created around 2001 that allows a one-time removal of certain penalties for otherwise compliant taxpayers. It covers a single tax period and does not require proof of hardship.

Starting with 2025 Form 1040 returns processed in summer 2026, the Automatic Exemption from Penalty program waives certain penalties automatically for eligible taxpayers. No separate request is needed. The AEP program starts phasing in from 2026 and replaces the first time penalty abatement program for covered penalties on returns due in 2027 and later.

Here's how the pieces fit together:

• FTA remains available for returns due before 2027 (you must request it).

• AEP begins covering 2025 individual returns and 2026 quarterly business returns automatically.

• Reasonable cause penalty relief, statutory exception claims, and other administrative relief paths still exist alongside both programs.

What is IRS First Time Penalty Abatement (FTA)?

First time abatement is an IRS administrative waiver that can remove three specific penalty types:

• Failure to file penalties under IRC §6651(a)(1) for late income and business returns.

• Failure to pay penalties under IRC §6651(a)(2) for not paying tax shown on a filed return by the due date.

• Failure to deposit penalties under IRC §6656 for late or missed payroll tax deposits.

FTA applies to one tax period at a time-for example, your 2022 Form 1040 or a specific quarterly Form 941. It's generally only available once every three clean years. For first-time filers, compliance history is typically required to qualify for FTA, meaning you need prior years of on-time filing and payment.

FTA does not require you to prove reasonable cause. Instead, it relies on a clean compliance history and current filing and payment status. It applies to individuals, businesses, and payroll filers, but not to information returns or event-based returns like estate tax or gift tax filings.

Common scenarios where FTA is used:

• A taxpayer missed the April deadline for their 2023 Form 1040 and filed several months late.

• A small business failed to deposit taxes for one payroll quarter but had a perfect record before that.

• A sole proprietor filed on extension but forgot to pay the balance by the original due date.

Eligibility rules for First Time Penalty Abatement

IRS first time penalty abatement is only available if you meet three main conditions: clean history, current filings, and a payment arrangement.

Clean history requirement:

• Practical eligibility for FTA requires having no penalties assessed in the prior three tax years for the same type of tax. If an earlier penalty was assessed but later removed due to reasonable cause relief or a statutory exception, that year does not disqualify you. To qualify for FTA, taxpayers must have a clean compliance history.

Filing requirement:

• To qualify for FTA, taxpayers must have filed all required returns (or have valid extensions in place) as of the date of the abatement request. This includes the tax period for which you seek relief. Timely filing and timely electronic filing of returns matters.

Payment requirement:

• All tax due for the year must be paid or covered by an IRS-approved arrangement, such as an installment agreement or a payment plan. You need to correct tax balances before or alongside your request.

FTA generally doesn't apply when there is an open fraud investigation, significant accuracy related penalties, or certain criminal tax issues. Reasonable cause is determined on a case-by-case basis when FTA does not apply.

Example: A taxpayer missed the April 2023 deadline for their 2022 Form 1040 and filed in December 2023. They had no penalties for 2019, 2020, or 2021, had filed those returns on time, and either paid the 2022 balance or entered a payment plan. This taxpayer would generally qualify for time penalty abatement on the 2022 late filing penalty.

Automatic Exemption from Penalty (AEP) vs. First Time Abatement (FTA)

AEP is the new automatic exemption system the IRS is phasing in to replace FTA for future tax years. The goal is to automatically provide penalty relief to eligible taxpayers during return processing, cutting out the need for phone calls and paperwork.

Key differences:

• FTA requires an abatement request-either by phone or by submitting IRS Form 843. It applies to returns due before 2027.

• AEP is automatic. Starting summer 2026 for 2025 Form 1040 returns, no taxpayer action is needed if you qualify. AEP applies to 1040 forms filed for the 2025 tax year.

• Both programs rely on a history of timely filing and payment-similar filing compliance rules apply.

• AEP is designed to reduce phone calls, letters, and manual requests to seek relief.

• AEP waives penalties for timely tax filers who meet the compliance history test.

• No action is needed to receive AEP relief if you qualify.

Timeline:

• 2025 tax year (Form 1040 due April 15, 2026): AEP begins applying automatically to eligible penalties processed in 2026.

• Returns due on or after January 1, 2027: AEP fully replaces first time abatement for covered penalties. FTA is no longer available for those returns.

• Reasonable cause, statutory exception, and other administrative waiver paths remain available for taxpayers who don't qualify for automatic relief.

During the transition, some qualifying taxpayers may still receive penalty notices if the IRS system hasn't flagged eligibility. In those cases, you can still request FTA or contact the IRS directly to request correction.

Which IRS penalties can be waived with FTA or AEP?

Not all IRS penalties are eligible for first time penalty abatement or automatic exemption. Here's what qualifies and what doesn't.

Eligible penalty types:

• Failure to file penalties for late filing of income and certain business returns (Forms 1040, 1120, 1065, etc.).

• Failure to pay penalties for not paying tax shown on a filed return by the due date.

• Failure to deposit penalty charges for late or missed payroll tax deposits (Forms 941, 940, 943, 944, 945).

• Failure-to-file penalties can be waived under reasonable cause even outside FTA/AEP.

Penalty types that do not qualify:

• Estimated tax penalty under IRC §6654 or §6655. Certain penalties, like estimated tax penalties, are not eligible for relief through FTA or AEP.

• Most accuracy related penalties (negligence, substantial understatement under IRC §6662). However, accuracy-related penalties may qualify for relief if good faith is shown through a separate reasonable cause claim.

• Civil fraud penalties and certain trust fund recovery penalties.

• Penalties related to information returns are generally excluded.

How penalties are computed:

• Failure to file: 5% of unpaid tax per month (up to 25%).

• Failure to pay: 0.5% of unpaid tax per month (up to 25%).

• Abatement removes the penalty portion, but the underlying tax and most interest remain. You still need to pay penalties that are not eligible for relief, and you must pay the correct tax owed.

Some complex or high-dollar cases may require reasonable cause documentation or a formal appeal rather than simple tax penalty abatement.

Interest relief: What happens to interest when penalties are abated?

IRS interest and IRS penalties are separate charges, but they're linked. Interest accrues on unpaid tax from the original due date until paid in full, and it also accrues on assessed penalties until those are resolved.

Here's how interest relief works:

• Interest on the underlying tax generally cannot be waived. It runs from the due date until you pay the outstanding balance in full.

• When an IRS penalty is removed through FTA, AEP, or reasonable cause, any interest that was charged on that specific penalty is also removed automatically. This is the primary form of interest relief most taxpayers receive.

• True interest abatement-removing interest on the tax itself-is rare and typically limited to situations involving an IRS mistake, unreasonable processing delay, or incorrect advice from the IRS.

• Interest rates change quarterly based on the federal short-term rate plus a statutory spread, so leaving a balance unpaid gets more expensive every quarter.

Example: A taxpayer's 2021 return was filed late in 2023. The IRS assessed a failure-to-file penalty and began charging interest on that penalty through 2024. If the penalty is abated via FTA, the interest that accrued specifically on that penalty line is reversed. But interest on the unpaid tax from the original 2021 due date remains.

This is why quick action matters-even partial tax relief on penalties saves you from accumulating interest on those penalty amounts.

How to request First Time Penalty Abatement (before AEP replaces it)

For returns due before 2027, IRS first time penalty abatement still requires an active abatement request unless the system applies automatic exemption. Taxpayers can request FTA either by phone or by submitting a written request.

Your main options to request relief:

• Call the toll free number on your IRS notice (CP14, CP22, CP161, or similar) and ask the IRS representative specifically for first time abatement for the listed penalty and tax year. You can request penalty relief by calling the IRS.

• Submit IRS Form 843, Claim for Refund and Request for Abatement. Taxpayers can request FTA relief using Form 843. Include the tax type, IRS form number (1040, 941, etc.), tax period, and penalty codes.

• Write a brief abatement request letter with the same information and mail it with a copy of your notice.

When calling, have ready:

• Your IRS notice, Social Security Number or EIN, and the tax year in question.

• Confirmation that the last three years' tax returns are filed and your current year return is filed or extended.

• Proof that tax is paid or you've entered into an installment agreement.

You must provide supporting documentation for your abatement request, especially for written submissions. The IRS reviews penalty abatement requests on a case by case basis. Many simple FTA requests are approved immediately by phone. More complex cases or Form 843 submissions can take weeks or months-the IRS does not have a set timeline for penalty relief approval.

ClearNotice helps taxpayers interpret the exact penalties and codes in their IRS letters so they can reference the right amounts when they speak to the IRS directly or complete Form 843.

Other IRS penalty relief paths: reasonable cause, statutory exceptions, and administrative waivers

If you do not qualify for first time abatement or automatic exemption, you may still get IRS penalty relief through other programs. The IRS can waive penalties for reasonable cause, and there are additional paths worth knowing.

Reasonable cause relief:

• Applies when you exercised ordinary care and prudence but still could not file tax returns or pay on time. Common qualifying circumstances include serious illness, natural disasters, destruction of records, or an unexpected death in the family.

• Reasonable cause relief covers failure to file, failure to pay, and some accuracy related penalties.

• You must show ordinary care and prudence. The IRS requires a detailed written explanation and supporting documents-medical records, insurance claims, disaster declarations, or similar proof.

• The IRS considers all facts and circumstances for reasonable cause relief. Each case is evaluated individually.

Statutory exception:

• Statutory exception relief applies if IRS provided incorrect advice that you reasonably relied on-for instance, incorrect written guidance in a letter or notice.

• Also covers situations like timely mailed returns treated as timely filed under IRC rules.

• Requires proof of the IRS error, such as letters or transcripts showing incorrect instructions.

Administrative waivers:

• The IRS sometimes issues nationwide or industry-wide administrative relief through official guidance-for example, during natural disasters or when tax law changes delay form availability.

• These are announced via IRS news releases and Internal Revenue Bulletins.

Any of these relief types can be requested via Form 843 or a written statement. A tax professional, tax advisor, or tax attorney can help you build a stronger case, especially for complex tax issues or large penalty amounts.

What to do after a penalty decision: payment plans, appeals, and future FTA eligibility

Some penalty abatement requests are only partially approved or denied outright. Here's what to do next.

If penalties remain and you cannot pay in full:

• Apply for an IRS installment agreement online or by phone. A payment plan lets you pay penalties and tax debt over time while stopping more aggressive collection actions.

• Pay as much as possible immediately to reduce ongoing interest and failure to pay charges.

If relief is denied:

• You can request review by the IRS Independent Office of Appeals within the timeframe stated in the denial letter.

• Appeals are generally written but may include phone or video conferences. You'll restate your tax situation, facts, and relief theory-whether FTA, reasonable cause, or a statutory exception. Tax law steps for appeals are outlined in your denial notice.

• A tax attorney or tax advisor can help navigate complex appeals.

Future eligibility:

• Once you use FTA or receive an automatic exemption for a tax year, you must maintain a clean penalty record for at least three subsequent years before you generally qualify again.

• Example: You use FTA on 2023 penalties. Stay penalty-free for 2024, 2025, and 2026. You may be eligible again for a 2027 penalty if all criteria are met and tax law changes haven't altered the rules.

Staying current on filing compliance and paying taxes-especially after receiving relief-is crucial to avoiding IRS collections like liens, levies, or wage garnishment.

Using ClearNotice to understand your IRS penalty letter and next steps

ClearNotice is a digital tool that decodes IRS letters-CP and LT series notices-into plain English, including penalty lines, interest charges, and deadlines.

Here's how it works:

• Upload an IRS notice showing a failure to file or failure to pay penalty.

• ClearNotice identifies the type of IRS penalty, tax year, notice deadline, and whether FTA, AEP, or reasonable cause may be relevant to your tax situation.

• You receive a step-by-step checklist for requesting abatement, setting up payment plans, or gathering documents.

ClearNotice is not a substitute for a tax attorney or CPA, but it makes it easier to talk to the IRS or a tax professional by clearly summarizing what your notice means. As AEP and new administrative waiver programs roll out in 2026–2027, ClearNotice highlights when penalties should have been automatically exempted and helps you know when to contact the IRS to correct missing automatic relief.

Key takeaways: First Time Penalty Abatement in a changing IRS landscape

• First time penalty abatement remains available for removing failure to file and failure to pay penalties on one tax period when you have a clean prior history. First-Time Penalty Abatement has existed since 2001 and continues to help thousands of taxpayers each year.

• Beginning in 2026, the Automatic Exemption from Penalty program automatically relieves many penalties for qualifying taxpayers on 2025 and later returns, reducing the need for manual requests. AEP replaces the First-Time Penalty Abatement program for returns due in 2027 and beyond.

• Reasonable cause, statutory exception, and other administrative waivers remain available for taxpayers who do not qualify for FTA or AEP.

• Interest relief is limited, but interest tied to any abated penalty is removed-making prompt action to request abatement or request relief valuable.

• ClearNotice helps taxpayers read and understand their IRS letters so they can confidently pursue the right form of IRS penalty abatement and avoid missing critical deadlines.