Penalty Relief

What is penalty relief

Penalty relief is a reduction or removal of IRS penalties when you meet specific criteria. Common penalties include failure-to-file, failure-to-pay, and accuracy-related penalties. Interest generally cannot be removed unless a related penalty is abated.

Automatic Exemption from Penalty AEP, new in 2026

On July 8, 2026 the IRS announced the Automatic Exemption from Penalty, which it describes as a systemic administrative relief program that removes the need to ask. In the agency's words, taxpayers "do not need to take action to receive this relief"; when they qualify, the penalty is simply not assessed during processing and the IRS issues a notice confirming the relief was granted.

• Covers failure to file, failure to pay, and failure to deposit penalties when the return type is eligible.
• Qualifying history: timely filing and payment of any tax due for the three prior years, or 12 consecutive quarters for quarterly returns.
• Not every return qualifies. The IRS names information returns and returns filed for infrequent events, such as Form 706 estate and Form 709 gift returns, as generally ineligible.
• Timing: the IRS says AEP is expected to begin in summer 2026 for tax year 2025 returns and 2026 quarterly returns, and it replaces First Time Abatement for eligible returns with original due dates on or after January 1, 2027.
• Interest on the underlying tax is unaffected. You still owe the tax, its interest, and any penalty that is not eligible. (When a penalty is removed, the IRS does automatically reduce interest that accrued on that penalty.)

More on the changeover, including which return due dates land on which side of it: do you still have to ask the IRS for First Time Abate?

First Time Abatement FTA, during the transition

First Time Abatement is the one-time administrative waiver AEP is replacing. It still matters through the changeover: the IRS says some qualifying taxpayers may still receive penalty notices for eligible 2025 and 2026 quarterly returns, and those taxpayers may contact the IRS to request First Time Abatement. FTA also continues to apply to prior-year returns and to returns processed before AEP is implemented.

• Applies to failure-to-file and failure-to-pay for a single tax period in many cases.
• Requires all prior returns filed and no penalties in the prior three years for the same issue.
• Current return or extension must be filed and taxes paid or in a plan.
• Still the route for older tax years, and for eligible 2025 and 2026 periods where a penalty was assessed anyway.

Reasonable cause

Reasonable cause relief is available when you exercised ordinary business care but could not comply due to events outside your control.

Common grounds

• Serious illness or incapacity affecting the taxpayer or an immediate family member.
• Records unavailable due to events like fire, natural disaster, or theft.
• Reliance on incorrect written advice from a qualified professional or the IRS.
• Other unusual events where paying or filing on time would have been unreasonable.

Documentation to include

• Medical letters, hospital records, or caretaker documentation.
• Police reports, insurance claims, or third-party statements.
• Copies of correspondence showing timelines, extensions, and efforts to comply.

Statutory relief

In limited situations, specific statutes or IRS initiatives authorize relief. Examples include written advice penalties or system-wide penalty relief related to extraordinary events. These are evaluated case by case based on published guidance.

How to request penalty relief

Start by checking whether you need to request anything at all. For eligible returns, AEP is applied during processing without a request, and a notice confirms it. The steps below are for everything AEP does not cover: older tax years, ineligible return types, penalties outside the covered three, and cases where a notice arrived anyway during the transition.

1. Confirm all returns are filed and current year obligations are up to date.
2. Identify the penalty type and the period. Verify eligibility for AEP, FTA, or reasonable cause, and if you have a documented hardship, lead with reasonable cause so an administrative waiver does not absorb the year.
3. Prepare a concise letter or use the relevant IRS form detailing facts, dates, and supporting evidence.
4. If you owe a balance, decide whether to enter a payment plan or pursue an Offer in Compromise and request penalty relief alongside.

How penalty relief interacts with payment plans and OIC

Penalty relief can reduce the overall balance and lower the payment needed in an installment agreement. For Offers in Compromise, correcting penalties first can improve the acceptance range by reducing the assessed amount. If you qualify for FTA, request it early so interest on penalties stops accruing.

• Payment plans
• Offer in Compromise
• Currently Not Collectible

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