IRS Making Sweeping Changes That Will Impact Millions of Americans

A change announced by the IRS could help you keep more cash in your wallet. Rather than requiring taxpayers to request tax penalty relief, a new program may automatically apply that relief, potentially saving taxpayers money. The change might further simplify the tax process, saving taxpayers time and offering a more streamlined experience.

Here's what you should know about this new program, when it takes effect, and how it works.

The Automatic Exemption from Penalty (AEP) program

The IRS has announced an AEP program to launch in summer 2026. The program may waive some tax penalties for eligible taxpayers who have a three-year history of filing and paying their taxes on time.

Previously, taxpayers were required to apply for a tax penalty waiver, a step that many never took. Under the new program, those waivers would be automatic, ensuring more taxpayers enjoy the benefit that was already available to them.

What the program replaces

The AEP program replaces the First Time Abate system, which allowed taxpayers with a clean compliance history to request penalties to be removed.

Many taxpayers didn't know the system existed or weren't aware of how to make a request. Some taxpayers weren't able to get through to the IRS or didn't have a tax professional helping them, so they were unable to file a request. Since low-income taxpayers often don't have a tax professional, this new program could be particularly valuable for individuals who are already struggling to pay their bills and who can't afford a tax penalty.

When the AEP program goes into effect

The AEP program applies to 2025 returns and 2026 quarterly filings, and it goes into effect in the summer of 2026. The program's full effect should be felt in 2027 as it replaces the First Time Abate system for tax returns that are due after January 1, 2027. Once fully in effect, taxpayers filing their 2026 returns could automatically receive tax penalty relief.

Once the program is in effect, taxpayers should receive a notice from the IRS explaining that a penalty wasn't assessed because of their compliance history. However, the First Time Abate system may still apply to returns from previous years; if taxpayers receive a penalty notice but no notice alerting them that their penalty was not assessed, they may need to contact the IRS to request penalty relief.

The tax penalties affected

The program prevents common failure to file, failure to pay, and failure to deposit certain tax penalties from being assessed for individual taxpayers. It also prevents failure to file, failure to pay, and failure to deposit penalties from being assessed for business taxpayers.

The cost of such penalties can quickly add up, especially since late filing penalties may be up to 25% of the amount of the unpaid tax owed.

Keep in mind that while the program ensures the tax penalty itself isn't assessed, taxpayers are still responsible for any owed tax or interest. Certain types of returns, including estate and gift tax returns, generally aren't eligible for AEP, so taxpayers are responsible for any tax penalties incurred on those types of returns.

Who may be eligible

To qualify, taxpayers must have filed timely returns and paid any owed taxes for the previous three consecutive years. If taxpayers file quarterly returns, they must usually have done so on time for the previous 12 consecutive quarters. Both individual taxpayers and business taxpayers may qualify for AEP.

A win-win for all involved

The AEP program may be a win for both taxpayers and the IRS. It offers taxpayer penalty relief without requiring them to make a request and navigate the administrative requirements.

At the same time, the program may help reduce phone calls, written requests, and manual penalty abatement cases that the IRS needs to process. Ultimately, it may allow IRS employees to help taxpayers with other issues, which is particularly important given the staffing challenges the organization faces after having lost more than a quarter of its staff in the past year.

Bottom line

The AEP program is a major step forward for the IRS, promoting compliance and fairness to taxpayers who have demonstrated a history of filing and paying their taxes on time. It should help eligible taxpayers receive the relief that's been available, but that was previously more difficult to access. The program's creation and implementation are part of a broader IRS push pairing easier compliance for consistent tax filers with tighter enforcement elsewhere, such as the organization's new scrutiny of certain fraudulent charitable contribution schemes.

If you have a history of filing and paying your taxes on time, this program might help you avoid tax penalties. It's also a good idea to consult with a tax professional, who can help ensure you're accurately filing your taxes so you can eliminate some money stress and avoid those tax penalties in the first place.

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