Automatic penalty relief modernizes IRS penalty administration while creating new controversy considerations
For many years, FTA has served as one of the IRS' primary administrative penalty relief mechanisms for taxpayers demonstrating a history of voluntary compliance. Unlike statutory reasonable cause relief, FTA required taxpayers or their authorized representatives to affirmatively request removal of eligible penalties after they had been assessed.
The newly announced AEP fundamentally changes that process. Rather than requiring taxpayers to request administrative relief, the IRS will automatically evaluate eligibility during return processing and suppress assessment of qualifying penalties when a taxpayer has demonstrated a consistent compliance history.
Beginning in summer 2026, AEP generally applies to original tax year 2025 returns, quarterly returns beginning in 2026 and future eligible filing periods. To qualify, taxpayers generally must have timely filed returns and paid tax liabilities for the preceding three tax years, or twelve consecutive quarters for quarterly filers.
When eligible, the IRS will automatically prevent assessment of:
- Failure-to-File penalties under section 6651(a)(1);
- Failure-to-Pay penalties under section 6651(a)(2) and, where applicable, section 6651(a)(3);
- Failure-to-Deposit penalties under section 6656.
The IRS will issue a notice informing taxpayers when automatic relief has been applied.
Not all returns qualify for AEP. The IRS has indicated that information returns, estate tax returns (Form 706), gift tax returns (Form 709) and certain other returns filed only in response to specific transactions generally remain outside the scope of the program.
The IRS also announced a phased transition from FTA. During summer 2026, some taxpayers may still receive penalty notices before IRS programming is fully implemented. In those situations, taxpayers who believe they qualify should continue requesting FTA through existing administrative procedures. Beginning with returns having original due dates on or after Jan. 1, 2027, AEP will fully replace FTA for eligible returns.
Importantly, AEP does not modify statutory reasonable cause relief. Taxpayers who do not qualify for automatic relief, or whose penalties fall outside the scope of AEP, may continue requesting penalty relief based on reasonable cause under existing IRS procedures. Likewise, taxpayers remain responsible for any underlying tax liabilities, accrued interest and penalties that are not eligible for automatic relief.
For businesses and individual taxpayers with strong filing and payment histories, AEP should simplify interactions with the IRS by reducing the need to request administrative penalty relief for isolated compliance errors. This may result in fewer penalty notices and less time spent pursuing routine abatements.
However, taxpayers should not assume that all penalties will automatically be removed. During the implementation period, IRS programming changes may result in some eligible taxpayers receiving penalty notices before the automated relief process is fully operational. Taxpayers receiving a penalty notice should carefully review whether the penalty was properly assessed and consult their tax advisor if they believe they qualify for relief. Additionally, AEP applies only to specific penalties and eligible returns, making it important to continue evaluating other available penalty relief provisions, including reasonable cause, when appropriate.
RSM insights
- Automatic relief should reduce administrative burden. Eligible taxpayers generally will no longer need to request FTA for qualifying penalties because relief will be applied during IRS processing.
- Continue reviewing IRS notices. During the phased implementation, some eligible taxpayers may still receive penalty notices before IRS systems are fully updated. Those penalties may still qualify for administrative relief.
- Not all penalties or returns are covered. AEP applies only to certain penalties and eligible return types. Taxpayers should continue evaluating other available penalty relief options, including reasonable cause, when automatic relief is unavailable.
- Maintaining a strong compliance history remains important. Timely filing returns and paying tax liabilities continues to be the foundation for qualifying for administrative penalty relief under the new program.
