Beginning with tax returns due on or after January 1, 2027, the IRS will now automatically abate penalties for the failure to file, failure to pay, or failure to make tax deposits for annual and quarterly tax filings whenever a taxpayer has three prior years (or 12 consecutive quarters for quarterly returns) of consistently filing tax returns on time, and paying tax on time (or depositing tax payments on time). The new program is called the Automatic Exemption from Penalty, or AEP.
This is consistent with the IRS’ First Time Abatement Program which will cease to exist in 2027. This relief is only for the first year (or quarter) of penalties. If a taxpayer has three years or three quarters of penalties, the IRS may now remove penalties for the first year under AEP, but the taxpayer will still have to request penalty relief for the second and third years if the taxpayer believes the penalties should be abated.
While this will be excellent news for some taxpayers, others may not benefit from penalty relief applied in this manner. Consider a taxpayer who has an excellent filing and payment record, but for some reason incurs a penalty of $150 in 2027. The IRS reviews the taxpayer’s file and sees that the taxpayer was in full compliance in 2024, 2025, and 2026, so the IRS automatically abates the $150 penalty. Now imagine the same taxpayer completely forgets to file his tax returns in 2028, but this time, the penalty is $15,000. The taxpayer may want to request penalty abatement under AEP, but because of the relief in 2027, the taxpayer will be precluded and can only rely on reasonable cause to abate penalties.
To read the full release, click here.
