A business's filing record is reviewed year over year. In 2026, that history may determine whether the IRS assesses certain late-filing, late-payment, or late-deposit penalties, or automatically exempts you from them.
The IRS is transitioning from First Time Abate (FTA), which taxpayers must request, to Automatic Exemption from Penalty (AEP). The change matters, but it is not a blanket forgiveness program, and eligibility depends on your filing history and return type.
Scope note: Specific-account penalty questions and abatement requests belong to your CPA or tax professional. LunaSi does not prepare or file tax returns, request FTA or penalty relief, or represent taxpayers before the IRS. This article explains the program generally; it does not determine whether you qualify.
1. What the IRS’s AEP program changes
FTA has been the IRS’s most common administrative penalty waiver for taxpayers with three years of timely compliance. Under FTA, you contact the IRS to request relief. AEP changes the sequence: for qualifying returns, the IRS checks eligibility when the original return finishes processing and does not assess the covered penalty.
AEP begins in summer 2026. Relief starts with 2025 tax-year returns and 2026 quarterly returns, and applies to eligible returns in later periods. The eligible return series are Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and Form CT-1.
If AEP applies, the IRS sends a notice explaining that penalties were not assessed because of your timely compliance history. You do not file a form or contact the IRS to receive AEP. Form CT-1 is an important exception: although it is an eligible return series, it is not programmed for systemic automatic application. Taxpayers must contact the IRS for manual consideration.
AEP covers failure-to-file, failure-to-pay, and failure-to-deposit penalties, not every penalty. You remain responsible for unpaid tax, interest, and penalties that AEP does not cover. Interest charged on a penalty is automatically reduced or removed when the related penalty is reduced or removed.
2. FTA and AEP: request versus automatic
| Feature | First Time Abate (FTA) | Automatic Exemption from Penalty (AEP) |
|---|---|---|
| How relief works | The penalty is assessed first, then may be removed after a request | No covered penalty is assessed if eligibility requirements are met |
| Taxpayer action | Contact the IRS; a request can be made by phone using the number on the notice, by written statement, or with Form 843 | No request or form is required |
| Failure-to-pay penalty | May continue to accrue until the tax is paid | Does not accrue or get assessed on unpaid tax |
FTA remains available during the transition. It applies to eligible 2024 tax-year returns, 2025 quarterly returns, and prior eligible returns. It can also apply to eligible 2025 tax-year returns and 2026 quarterly original returns processed before AEP began, or that did not receive AEP consideration. In those cases, you must contact the IRS to request FTA.
For original returns with due dates on or after January 1, 2027, FTA will no longer be available and is replaced by AEP. As of October 2026, AEP is an IRS administrative program, not a statute, and the IRS’s transition guidance may be updated.
3. Who may qualify, and what AEP does not cover
AEP does not guarantee relief to everyone who files or pays late. The IRS checks the taxpayer’s record for the same return type. In general, timely compliance means both:
- The same return type was timely filed for the prior three years, or for 12 consecutive quarters for quarterly filers.
- Either no penalty was assessed, other than an estimated tax penalty, or a penalty was assessed and later abated for reasonable cause or IRS error.
Business taxpayers must also meet additional requirements. In the prior three years, or 12 consecutive quarters for quarterly filers, the IRS must not have waived the failure-to-deposit penalty four or more times, and the failure-to-deposit penalty must not have been charged for Electronic Federal Tax Payment System (EFTPS) avoidance.
AEP does not cover returns filed once or infrequently for event-based requirements, the Daily Delinquency Penalty (DDP), or information reporting that depends on another filing. It also does not address other penalties such as accuracy-related or information-return penalties.
The program’s lookback is especially important in 2026. An AEP determination for a 2026 return looks at 2023, 2024, and 2025-not the taxpayer’s 2026 conduct. Your 2026 filing record becomes part of the three-year lookback for future years. One late filing this year can cost you automatic relief later, which is why it’s worth treating 2026 as the year you protect. A 2026 misstep is not necessarily fatal: FTA remains available during the transition for eligible returns when requested.
4. Penalty mechanics and two simplified illustrations
The failure-to-file penalty is generally 5% of the tax due, less tax paid on time and available credits, for each month or partial month a return is late, up to 25%. If failure-to-file and failure-to-pay penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty for that month: for example, 4.5% plus 0.5%.
The failure-to-pay penalty is generally 0.5% of unpaid tax per month or partial month, capped at 25%. It drops to 0.25% per month during an approved payment plan for individuals who filed on time, and rises to 1% per month if tax remains unpaid 10 days after a notice of intent to levy. Failure-to-deposit penalty tiers are 2% / 5% / 10% / 15%.
For Forms 1040 and 1120 with a return due date after December 31, 2025, the minimum failure-to-file penalty applies only when the return is more than 60 days late. It is the lesser of $525 or 100% of the underpayment. This minimum applies to those forms only.
For partnership returns Forms 1065, 1066, and 8985, and S corporation returns Form 1120-S, with a due date after December 31, 2025, the base late-filing penalty is $255 per partner or shareholder per month, up to 12 months, even if the entity owes no tax. Form 1120-S is not among the AEP-eligible return series listed above.
Illustration 1: $20,000 unpaid balance, six months late. Assume a return and payment are six months late, the full $20,000 is subject to the penalty calculations, and there are no timely payments or available credits. The failure-to-file penalty is subject to a 25% maximum: $20,000 × 25% = $5,000. The failure-to-pay calculation is $20,000 × 0.5% × 6 months = $600. These are simplified calculations; overlapping months, the filing penalty cap, account details, and other facts affect an actual IRS assessment.
If the return qualifies for AEP, the covered failure-to-file and failure-to-pay penalties would not be assessed. Under FTA, the taxpayer must request relief after assessment, and the failure-to-pay penalty may continue to accrue until the tax is paid.
Illustration 2: partnership return filed two months late. A partnership with three partners files a Form 1065 two months late. Using the $255 base rate, the simplified penalty calculation is $255 × 3 partners × 2 months = $1,530, even if the partnership owes no tax. A qualifying eligible Form 1065 may receive AEP consideration; the example does not establish eligibility.
5. What Business Owners Should Do Now
Use a repeatable process to protect your filing history and catch problems early:
- Map each return and deposit obligation. Record the return type, responsible person, due-date tracking method, and payment or deposit workflow. Ask your tax professional to confirm tax-specific obligations.
- Review prior-year compliance records. Gather filed returns and notices for the same return type covering the relevant three years, or 12 consecutive quarters. Ask your CPA or tax professional to review possible penalties, abatement history, and AEP eligibility.
- Keep a predictable close calendar. Set internal deadlines for reconciliations, payroll records, accounts payable and receivable, and delivery of information to your tax preparer. Do not wait until a filing deadline to discover missing records.
- Read IRS notices promptly. If a notice shows an assessed penalty but you believe you qualified for AEP, contact the IRS. For CT-1, contact the IRS for manual consideration rather than expecting automatic application.
- Ask a tax professional about other relief options. If you do not qualify for AEP, you may still request penalty relief based on reasonable cause and may appeal an adverse decision. The IRS considers reasonable-cause requests case by case.
AEP is federal only; state penalty relief programs differ. For current program details, review the IRS’s Administrative penalty relief page, Publication 6171, AEP Myths vs Facts, and the IRS pages on failure-to-file penalties, failure-to-pay penalties, and reasonable-cause relief.
6. Getting Started
Start with one action: build a shared filing calendar and confirm the prior three years of records with your CPA or tax professional. LunaSi Accounting, LLC supports business owners with bookkeeping, monthly close, account reconciliations, AP/AR, payroll support, financial reporting, and Controller/CFO-level support. Clean, current books and a predictable close calendar help filing obligations stay on track. Contact LunaSi to discuss bookkeeping and financial operations support.
This content is for general informational purposes and is not legal, tax, or accounting advice. Consult a qualified professional for your specific situation.
09.10.2026