Millions to get tax penalty relief automatically

The Internal Revenue Service will begin applying an Automatic Exemption from Penalty (AEP) this summer, a move that could spare millions of taxpayers from filing and payment fines.

How the new system works

The AEP automatically removes penalties for failure to file, pay or deposit employment taxes for eligible returns. It covers original returns for tax years 2025 and 2026, as well as quarterly filings for those periods and future tax periods, according to the agency.

Eligibility hinges on a clean record: taxpayers who filed on time and paid any tax due in the three prior years, or who completed twelve consecutive quarters for quarterly returns, will receive the relief without any action required.

When the exemption is granted, the agency will issue a notice confirming the penalty has been waived.

Potential impact on taxpayers

Historically, taxpayers who missed a deadline had to request a waiver through the First Time Abate process, a manual procedure that often required phone calls or written petitions. In fiscal year 2025, roughly 220,000 individuals obtained such waivers.

Erin Collins, the National Taxpayer Advocate, estimates that if AEP had been in place for the same period, more than 1.5 million taxpayers would have benefited – a seven‑fold increase. “Providing automatic penalty relief will end unneeded financial headaches for hundreds of thousands of taxpayers in the months ahead,” said Glen Frost, a founding partner at Frost Law.

Late filing penalties can reach up to 25 % of unpaid tax, while payment and deposit penalties accumulate over time. For low‑income individuals, even modest fines can strain budgets already stretched by rent, utilities and medical costs.

Unlike the earlier manual process, the automatic exemption does not require taxpayers to understand complex rules or work through the IRS’s phone system. This change could be especially helpful for those without professional tax advice, a group that often missed out on relief simply because they were unaware of the option.

Limits and exclusions

Not every return qualifies for the exemption. Information returns and filings tied to specific, infrequent events—like Form 706 (U.S. Estate Tax Return) or Form 709 (Gift Tax Return)—are generally excluded, the agency noted.

Frank Bisignano, the agency’s chief executive officer, explained that the automatic approach “recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.” By reducing the volume of manual waiver requests, the IRS expects fewer phone calls and written inquiries, freeing staff to address more complex issues.

Collins added that the modernization could improve overall taxpayer service, allowing employees to focus on matters that truly need direct attention.

The IRS expects fewer calls.

While the AEP directly benefits those who meet the eligibility criteria, the overall system gains from reduced administrative load.