The IRS Is Now Automatically Waiving Late Tax Penalties for Millions - Here's How to Qualify

One tax mistake can get expensive fast. Filing late can trigger a penalty reaching 25% of unpaid tax, while paying late can produce another penalty that grows month by month. But the IRS is changing how it treats taxpayers who normally follow the rules. For taxpayers trying to avoid wasting money, a clean tax history may now be worth more than they realize.

The biggest difference happens before a qualifying penalty ever lands on your account. The IRS began rolling out its new Automatic Exemption from Penalty, or AEP, program in summer 2026. It replaces the long-standing First Time Abate system, which required taxpayers to know relief existed and proactively ask the agency for it. 

In fiscal year 2025, nearly 220,000 taxpayers received First Time Abate relief, but the Taxpayer Advocate Service estimates that more than 1.5 million would have received relief if AEP had already been operating — about seven times as many people.

Here's what you need to know.

A clean three-year history can qualify you automatically

The key requirement is generally a record of timely compliance. For annual returns, the IRS says the same type of return must have been filed on time during the previous three years, without a disqualifying penalty; quarterly filers generally need 12 consecutive quarters of compliant history.

If an eligible taxpayer then files or pays late, the IRS can prevent the qualifying penalty from being assessed during original return processing. There's no special application, form, or phone call required when AEP applies.

Three common penalties are covered

AEP can cover certain failure-to-file, failure-to-pay, and failure-to-deposit penalties. For individual taxpayers, the failure-to-file penalty generally starts at 5% of unpaid tax for each month or partial month a return is late and can reach 25%. The failure-to-pay penalty generally starts at 0.5% per month and can also eventually reach 25%.

The failure-to-deposit penalty, which generally applies to employers that miss required employment-tax deposits, depends on how late the deposit is. The penalty is 2% for deposits one to five calendar days late, 5% for six to 15 days late, and 10% once the deposit is more than 15 days late. It can rise to 15% if the deposit remains unpaid more than 10 days after the IRS issues certain notices demanding payment.

AEP doesn't erase the underlying tax bill, however, and taxpayers remain responsible for interest on unpaid tax and penalties that aren't covered. Accuracy-related penalties, information-return penalties, and certain other charges don't qualify.

The transition starts with 2025 and 2026 returns

The IRS says AEP applies to eligible original 2025 tax-year returns, 2026 quarterly returns, and future periods. There is a transition period, though: Some qualifying 2025 returns or 2026 quarterly filings processed before AEP starts for that return still require taxpayers to request First Time Abate manually.

For original returns with due dates on or after Jan. 1, 2027, AEP replaces First Time Abate for eligible returns. That makes the automatic system an ongoing change rather than a one-time tax-season giveaway.

Missing the automatic break doesn't end your options

Not qualifying for AEP doesn't necessarily mean you have to accept a penalty. The IRS still allows taxpayers to request reasonable-cause relief when circumstances outside their control prevented timely filing or payment.

That could involve situations where a taxpayer exercised ordinary care but still couldn't meet the requirement, although the IRS evaluates the individual facts. If you receive a penalty notice during the AEP transition and believe your compliance history qualifies, the agency also advises contacting the IRS rather than simply paying the charge.

Bottom line

Would your last three years of tax records qualify as a clean compliance history if you accidentally filed or paid late this year? Checking now can be useful, especially during the transition when some taxpayers may still receive a penalty notice even though similar future mistakes would receive automatic consideration.

AEP isn't permission to file late. But knowing how the new system works, reviewing any IRS notice carefully, and asking about reasonable-cause relief when necessary can help you keep more of your money instead of paying a penalty you may not actually owe.

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Author Details

Adam Palasciano

With six years of experience covering personal finance, Adam Palasciano specializes in retirement planning. He helps readers make smarter investment decisions as retirement approaches and find ways to make their savings last longer once they get there. He also breaks down complex topics like Social Security benefits and taxes so readers can better understand how to maximize the income they’ll rely on later in life.