Penalties

The IRS is getting ready to make penalty relief a whole lot easier for some taxpayers. Instead of having to call or write the IRS to ask for a first-time penalty abatement, qualifying taxpayers will soon have those penalties waived automatically. The new program, called Automatic Exemption From Penalty (AEP), is expected to roll out sometime this summer and will apply to original 2025 tax returns. If you've been compliant with your tax obligations for the past three years and you either pay your tax bill or make arrangements to pay it, the IRS may automatically waive certain penalties.

The relief covers penalties for filing a return late, paying taxes late, and making late payroll tax deposits. It also applies to delinquent partnership and S corporation returns. One important exception is the estimated tax penalty, which is not eligible for automatic relief.

This is a significant change from the IRS's longtime First-Time Abate policy. In the past, taxpayers had to know the program existed and then contact the IRS to request penalty relief. Under AEP, the IRS will determine eligibility on its own, remove the penalty automatically, and send a letter letting taxpayers know the penalty wasn't assessed.

That said, the IRS is gradually phasing out the old First-Time Abate program, so some taxpayers may still receive penalty notices for 2025 and 2026. If that happens and you believe you qualify for relief, don't ignore the notice. You can still contact the IRS and request that the penalty be removed.

The numbers behind IRS penalties are eye-opening. During the 2025 fiscal year, the IRS assessed about $1.25 trillion in civil penalties. Roughly 92% of those penalties were related to late or unpaid employment taxes and payroll tax deposits, while the remaining penalties involved income and excise taxes. Here's the surprising part: the IRS also abated approximately $1.21 trillion of those penalties. Most of that relief went to businesses with unpaid payroll taxes. In other words, it's not uncommon for the IRS to assess a massive penalty initially and then later remove a significant portion of it once the taxpayer qualifies for relief.

The takeaway is simple: if you're generally compliant with your taxes, the IRS is making it much easier to receive penalty relief without jumping through hoops. While the estimated tax penalty is still off the table, this new automatic process should save many taxpayers both time and frustration.