IRS Penalty Relief in 2026: How the New Automatic Exemption and First Time Abate Work
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    IRS Penalty Relief in 2026: How the New Automatic Exemption and First Time Abate Work

    J&E Advisory TeamOctober 30, 2026

    Why IRS penalty relief matters more in 2026

    IRS penalty relief can cut a tax bill by hundreds or thousands of dollars, and the rules are changing right now. A late return or a late payment can trigger penalties that grow every month. Many taxpayers pay them without knowing the IRS has a process to remove them.

    At J&E Advisory Group, we see the same pattern often. A reliable taxpayer misses a deadline once, receives a notice, and assumes the penalty is permanent. In many cases it is not. The IRS is also moving from a relief program you have to request to one that applies on its own for eligible taxpayers.

    This article explains how the penalties work, how the new automatic exemption differs from the older First Time Abate program, and what to do if you already have a penalty on your account.

    How IRS late filing and late payment penalties work

    The two main penalties are separate, and they stack. Here are the current rules from the IRS:

    • Failure to file: usually 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25%.
    • Failure to pay: one-half of one percent of the unpaid tax for each month or part of a month, up to a maximum of 25%.
    • Higher payment penalty: the failure-to-pay rate rises to 1% per month if the tax is still unpaid 10 days after the IRS sends a notice of intent to levy.
    • Installment agreement rate: the failure-to-pay rate drops to one-quarter of one percent for months an installment agreement is in effect, if the return was filed on time.
    • Minimum penalty: if a return is more than 60 days late, the penalty is the lesser of $525 (for returns required to be filed in 2026) or 100% of the tax owed.

    Interest is a third cost. For the quarter that began October 1, 2026, the IRS underpayment rate for individuals is 7% per year, compounded daily. Interest is charged on the tax and on the penalties.

    The new Automatic Exemption from Penalty (AEP)

    In July 2026, the IRS announced a new Automatic Exemption from Penalty. It is designed to replace First Time Abate for eligible taxpayers. The idea is simple: if you have a clean recent history, the IRS does not assess the penalty at all, and you do not have to ask.

    Here is how it works, based on the IRS announcement and its penalty relief page:

    • Who qualifies: taxpayers who filed on time and paid any tax due in each of the prior three years. Quarterly filers need 12 consecutive quarters of timely filing and payment.
    • Which penalties: failure to file, failure to pay and failure to deposit.
    • Which returns: the program covers Forms 1040, 1065 and 1120, the employment tax series (Forms 940, 941, 943, 944 and 945) and Form CT-1.
    • Which periods: original returns for tax year 2025 and later, and quarterly returns for 2026 and later.
    • What you do: nothing. The IRS applies the exemption and sends a letter confirming it.
    • What it does not cover: you still owe the tax and the interest, along with any penalties outside the covered list.

    Some returns are excluded. These include information returns and returns filed only for a specific transaction or an infrequent event, such as estate and gift tax returns.

    What happens to First Time Abate

    First Time Abate, often called FTA, has been the main route for penalty relief for years. The IRS is phasing it out beginning in summer 2026. For eligible returns with original due dates on or after January 1, 2027, AEP replaces it.

    During the transition, some taxpayers who would qualify may still receive a penalty notice for a 2025 return or a 2026 quarterly return. In that case, you can still request FTA.

    FTA works differently from AEP:

    • It is not automatic. The IRS assesses the penalty first and removes it after you ask.
    • You can request it by calling the number on your notice, or in writing, including with Form 843.
    • You do not need to name the program or send documents. The IRS reviews your account records.
    • The failure-to-pay penalty can keep growing until the tax is paid, so paying quickly matters.
    • When a penalty is removed, the interest on that penalty is reduced or removed with it.

    To qualify, the same type of return generally must have been filed on time for the prior three years. Either no penalty was assessed in that period, other than an estimated tax penalty, or any penalty was later removed for reasonable cause or IRS error.

    Reasonable cause: relief if you do not qualify for automatic relief

    Some taxpayers will not meet the clean-history test. That does not end the conversation. The IRS says taxpayers who do not qualify for automatic relief can ask for reasonable-cause relief.

    Reasonable cause asks a different question. It does not look at your history. It looks at why the return or payment was late. A serious illness, a disaster, or being unable to get records are the kinds of facts that may support a request. The IRS decides case by case, and a weak or poorly documented request is often denied. This is where a clear written explanation and supporting records make a difference.

    Who is not covered

    Some penalties and returns fall outside both programs. The IRS lists the Daily Delinquency Penalty and information reporting that depends on another filing as not eligible for FTA or AEP. Business taxpayers have an extra test: the failure-to-deposit penalty cannot have been waived four or more times in the prior three years, and it cannot have been charged for avoiding the electronic payment system.

    If your issue involves foreign account or foreign entity reporting, other penalty rules may apply. We handle those under our international tax work, so ask us before assuming the rules above cover your situation.

    Common mistakes with IRS penalty relief

    • Paying the penalty without asking. Many taxpayers pay the full amount from a notice and never request relief.
    • Ignoring the notice. Deadlines on IRS letters are real, and ignoring one can lead to collection action. Our guide to what to do when you get an IRS letter explains the first steps: https://www.jeadvisorygroup.com/blogs/what-to-do-when-you-get-an-irs-letter
    • Assuming a clean history without checking. A past penalty that was never removed can disqualify you. Review your IRS account transcripts first.
    • Waiting to pay the tax. Relief removes penalties. It does not remove the tax, and interest keeps running on what you owe.
    • Skipping estimated payments. Penalties tied to underpayment are separate from the ones above. Our post on estimated taxes covers how to avoid them: https://www.jeadvisorygroup.com/blogs/estimated-taxes-are-a-pain-here-s-how-to-avoid-costly-penalties

    What to do next if you have an IRS penalty

    1. Read the notice and note the tax year, the penalty type and the response date.

    2. Pull your IRS account transcripts for the last three to four years to check your filing and payment history.

    3. File any missing returns. Relief generally depends on being current with filing.

    4. Pay what you can, or set up a payment arrangement, so penalties and interest stop growing.

    5. Request relief by phone, by letter or on Form 843, and keep copies of everything.

    6. Follow up. If the answer is no, ask about reasonable cause or an appeal.

    Frequently asked questions about IRS penalty relief

    What is the IRS Automatic Exemption from Penalty?

    It is a new IRS process that stops late filing, late payment and failure-to-deposit penalties from being assessed for eligible taxpayers. You qualify with a three-year history of timely filing and payment. The IRS applies it without a request and sends a letter.

    Is First Time Abate going away?

    The IRS is phasing it out beginning in summer 2026. AEP replaces it for eligible returns with original due dates on or after January 1, 2027. In the meantime, you can still request FTA if you receive a penalty notice for a 2025 return or a 2026 quarterly return.

    How do I request IRS penalty abatement?

    Call the number on your notice, or send a written request. You can use Form 843 and mail it to the address in the form instructions. You do not need to name the program, because the IRS reviews your account history.

    Does penalty relief remove the tax and interest too?

    No. You still owe the tax. Interest on a penalty that is removed is reduced or removed as well, but interest on the tax itself continues until it is paid.

    What is the IRS late filing penalty in 2026?

    It is usually 5% of the unpaid tax per month or part of a month, up to 25%. If a return is more than 60 days late, the minimum penalty is the lesser of $525 or 100% of the tax owed, for returns required to be filed in 2026.

    What if I do not qualify for automatic relief?

    You can ask for reasonable-cause relief, which looks at why you filed or paid late. It is decided case by case, so documentation matters.

    Can I get penalty relief if I cannot pay the tax I owe?

    Penalty relief and payment options are separate. An installment agreement can lower the failure-to-pay rate to one-quarter of one percent per month, if the return was filed on time. We often pursue both at once.

    Can J&E Advisory Group help me remove IRS penalties?

    Yes. J&E Advisory Group reviews your IRS account history, identifies which relief route fits, and prepares the request. We also help with unfiled returns, notices and payment plans.

    Does this apply if I live abroad or have foreign accounts?

    The penalty relief programs above cover the listed income, partnership, corporate and employment tax returns. Foreign account and international information reporting penalties follow other rules, so speak with an advisor before relying on this article.

    Penalties are one of the few parts of an IRS bill that can often be reduced, but only if the request is made correctly and on time. J&E Advisory Group, based in Miami, serves high-income earners across the U.S. and international taxpayers worldwide, from tax planning and FBAR reporting to foreign national tax preparation, complex international tax matters and IRS tax resolution, in English and Spanish.

    Schedule a confidential consultation at: https://outlook.office.com/book/JEAdvisoryGroup@jeadvisorygroup.com/s/WTstmtX_2Uqcb1XsqTi49Q2?ismsaljsauthenabled

    Or call (786) 622-2869.

    Learn more about our IRS tax resolution services: https://www.jeadvisorygroup.com/irs-tax-resolution-miami

    This article is general information, not tax, legal or investment advice for your situation. Tax rules change and the right strategy depends on your facts, so consult a qualified advisor before acting. Figures reflect federal law as of October 2026, and state rules vary.

    Sources

    IRS, IRS simplifies penalty relief, introduces automatic process for eligible taxpayers: https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers

    IRS, Administrative penalty relief: https://www.irs.gov/payments/administrative-penalty-relief

    IRS, Topic no. 653, IRS notices and bills, penalties and interest charges: https://www.irs.gov/taxtopics/tc653

    IRS, Interest rates remain the same for the fourth quarter of 2026: https://www.irs.gov/newsroom/interest-rates-remain-the-same-for-the-fourth-quarter-of-2026