Tim’s Tax News on the Tenth – July 2026

On July 8, 2026, the Internal Revenue Service announced a new automatic process to provide penalty relief for taxpayers with a history of filing and paying on time, reducing the need for those taxpayers to request assistance in addressing penalty relief.

The new Automatic Exemption from Penalty (“AEP”) will replace the long-standing First Time Penalty Abatement administrative relief and is designed to simplify the process and reduce the burden for those with a timely compliance history.

“Automatic Exemption from Penalty reflects the IRS’ commitment to making the payment of taxes owed simpler and more consistent,” said IRS Chief Executive Officer Frank J. Bisignano. “By automatically applying penalty relief, the IRS recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.”

The new Automatic Exemption from Penalty, or AEP, is a systemic administrative relief program expected to begin this summer. AEP applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, as well as future tax periods. Taxpayers qualify if they have a history of timely filing the return and paying any tax due in the three prior years (or 12 consecutive quarters for quarterly returns). When taxpayers qualify, penalties are not assessed during processing for:

• Failure to file
• Failure to pay
• Failure to deposit

Taxpayers do not need to take action to receive this relief. If eligible, the IRS will apply AEP and issue a notice confirming that the relief was granted.

Not all returns are eligible for AEP. For example, information returns and returns that are filed only in response to specific transactions or infrequent events (such as Form 706, U.S. Estate Tax Return, or Form 709 Gift Tax Return) generally are not eligible.

The First Time Penalty Abatement relief has been the most common form of administrative penalty relief, allowing eligible taxpayers with a history of timely compliance to request the removal of certain penalties.

The IRS will begin phasing out First Time Penalty Abatement relief and transitioning to AEP during the summer of 2026. During this transition, some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns. Taxpayers who believe they qualify may contact the IRS to request First Time Penalty Abatement.

AEP provides relief automatically and will replace First Time Penalty Abatement for eligible returns with original due dates on or after January 1, 2027. Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause. The IRS will review those requests and notify taxpayers of the outcome. 

While AEP prevents the assessment of certain penalties, taxpayers must still pay any tax and interest due, as well as any penalties not eligible for relief. The IRS is making this change to promote fairness and consistency in the application of penalty relief while encouraging voluntary compliance.

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 32 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.

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