IRS automatic exemption from penalty replaces First Time Abate starting in 2026

AEP applies to three penalty types:

• Failure to file
• Failure to pay
• Failure to deposit

These cover the most common penalty exposures for payroll teams. The IRS has confirmed that the following return series are eligible: Forms 940, 941, 943, 944, 945, and CT-1 — the core quarterly and annual employment tax returns payroll departments file regularly.

To qualify, your organization must have a timely compliance history: the same return type was filed on time and any tax due was paid in each of the three prior years. For quarterly filers — including those filing Form 941 — the lookback window is 12 consecutive quarters.

Two additional rules apply specifically to businesses:

• The failure to deposit penalty must not have been waived four or more times during the prior three years (or 12 consecutive quarters)
• The penalty must not have been charged for Electronic Federal Tax Payment System (EFTPS) avoidance

If an eligible return is processed and IRS records confirm a clean compliance history, AEP is applied automatically. A notice will follow confirming the relief was granted.

AEP is expected to begin this summer. It applies to:

• Eligible original returns for tax year 2025
• 2026 quarterly returns and all future tax periods

During the transition, some qualifying taxpayers may still receive penalty notices for eligible 2025 and 2026 returns if those returns were processed before AEP was available. If that happens, contact the IRS and request First Time Abate — FTA remains available during this window.

AEP fully replaces FTA for returns with original due dates on or after January 1, 2027.

Not all returns qualify. Information returns are excluded, as are returns filed in response to specific or infrequent events — including Form 706 (U.S. Estate Tax Return) and Form 709 (Gift Tax Return). If you're unsure whether a specific return is eligible, check the IRS administrative penalty relief page at irs.gov/payments/administrative-penalty-relief for the current eligible return list.

Non-qualifying taxpayers can still request penalty relief based on reasonable cause. Follow the instructions in the IRS notice you receive, or file Form 843 (Claim for Refund and Request for Abatement). The IRS will review the request and notify you of the outcome.

What AEP doesn't change

AEP prevents the assessment of qualifying penalties — it doesn't forgive the underlying tax liability. Any unpaid tax and interest remain due, as do penalties outside AEP's scope. The relief notice confirms no penalty was assessed; it doesn't move the tax due date.

If your organization maintains a consistent filing and payment record, AEP will apply automatically — no action needed. A few things are worth confirming before 2026 quarterly deadlines arrive:

• Confirm you're filing the correct return type consistently — the return type must match across the three prior years to establish the compliance history AEP requires
• Verify that EFTPS deposits are going out on time and in the correct amounts — late deposits remain the most common payroll penalty trigger and can affect AEP eligibility
• If you receive a penalty notice this summer and believe you qualify for relief, contact the IRS directly — FTA is still the right channel during the transition period

For payroll teams managing deposit schedules across multiple entities or states, a clean compliance history isn't only about penalty relief — it's the baseline for audit readiness. Greenshades automates payroll tax calculations, deposits, and filings to help teams stay accurate across every pay period and jurisdiction.

Frequently asked questions

What is the difference between AEP and First Time Abate?

Both programs provide the same type of administrative penalty relief for taxpayers with a clean compliance history. The key difference is process: First Time Abate required taxpayers to contact the IRS and request relief. AEP is automatic — applied during return processing with no taxpayer action required.

Does AEP apply to Form 941 filers?

Yes. Form 941 is an eligible return series under AEP. Quarterly filers qualify based on 12 consecutive quarters of timely filing and payment, rather than three calendar years.

What should I do if I receive a penalty notice during the 2026 transition?

During the summer 2026 transition, some qualifying taxpayers may still receive penalty notices before AEP is fully in place. If you believe you qualify for relief, contact the IRS and request First Time Abate — it remains available through the transition window.

Does AEP eliminate the tax I owe?

No. AEP prevents certain penalties from being assessed, but it does not reduce or eliminate the underlying tax liability or interest. Any unpaid tax and interest remain due regardless of AEP relief.

When does First Time Abate go away entirely?

First Time Abate will be fully replaced by AEP for eligible returns with original due dates on or after January 1, 2027.

Note: This information is for informational purposes only and does not constitute formal tax, legal, or compliance advice. Always consult with qualified tax advisors, legal counsel, and your organization's internal teams for guidance specific to your situation. Additional regulations may apply. For the most accurate and up-to-date information, refer to official government resources and regulatory agencies.