IRS kills First Time Abate, replaced by Automatic Exemption

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The IRS recently announced it is phasing out First Time Abate and replacing it with a new Automatic Exemption from Penalty program, or AEP. This is not a minor procedural tweak. It changes how penalty relief gets delivered to millions of taxpayers, and it changes what we owe our clients as their advisors.

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AEP is a systemic, automated relief program. It is expected to begin phasing in this summer for tax year 2025 original returns and 2026 quarterly returns. Starting with returns having original due dates on or after Jan. 1, 2027, AEP fully replaces FTA.

Eligibility tracks FTA’s old standard closely. Taxpayers qualify if they have a clean compliance history: timely filing and full payment of tax due for the prior three years, or 12 consecutive quarters for quarterly filers. When a taxpayer meets that bar, the IRS will not assess failure-to-file, failure-to-pay or failure-to-deposit penalties during return processing. No request. No Form 843. No phone call. The IRS issues a notice confirming the relief was applied.

Not everything qualifies. Information returns and one-off filings tied to specific transactions, such as Form 706 (estate tax) and Form 709 (gift tax), generally fall outside AEP. Those clients still need the old playbook.

Win for taxpayers

The National Taxpayer Advocate’s office called this a “long-awaited taxpayer win,” and the numbers back that up. In fiscal year 2025, roughly 220,000 taxpayers received FTA relief, entirely through the manual request process. TAS estimates that if AEP had been in place, more than 1.5 million taxpayers would have received relief automatically, about seven times as many. That gap tells you everything about how many eligible taxpayers were leaving money on the table simply because they didn’t know FTA existed, didn’t know how to ask for it, or couldn’t get through to the IRS.

There is also a structural fix built into AEP that FTA never had. Under FTA, a taxpayer could get relief, later have additional tax assessed on the same period, and then have to call the IRS again to request abatement on the new balance. Under AEP, once relief is granted for a tax period, the IRS should not assess covered penalties again for that period, even if additional tax is later assessed. That closes a repeat-contact problem our clients have been living with for years.

What practitioners need to do right now

Do not stop requesting First Time Abate. The transition runs through this summer, and FTA does not disappear on July 8. Some qualifying taxpayers will still receive penalty notices during the changeover, particularly on returns processed before AEP was live. If a client gets a notice and you believe they qualify, request an FTA. Do not assume the system already handled it. If there is no separate notice confirming AEP was applied, call and ask.

Update your workflow now, not next April. Once AEP is running at scale, your job on penalty issues shifts. You are no longer the one filing FTA requests for every eligible client. You are the one auditing whether the IRS actually applied AEP correctly, and catching the returns that fall outside its scope, like the estate and gift tax filings that AEP does not touch. Build a checklist for your penalty notice intake process that asks: Is this an AEP-eligible return, did the client receive an AEP confirmation notice, and if not, why not.

Know the reasonable cause interaction because the IRS got this part wrong. This is the detail that should concern every tax practitioner reading this. AEP is an administrative waiver, the same as FTA was. Reasonable cause relief is a statutory right under the Internal Revenue Code. The problem: AEP may be applied automatically before the IRS even considers whether a client’s specific facts support reasonable cause. That matters because using an administrative waiver in one year can burn a client’s access to relief in a later year when they no longer qualify for AEP but would have benefited from reasonable cause treatment in the earlier year. TAS flagged this exact scenario and recommended the IRS let reasonable cause be substituted for AEP when the facts support it. As of this announcement, the IRS has not adopted that fix.

What this means for you. If a client’s penalty situation involves genuine reasonable cause facts, illness, natural disaster, reliance on erroneous written advice, do not let AEP quietly resolve the issue and move on. Document the reasonable cause basis anyway. If the IRS’s automatic system applies AEP instead of considering reasonable cause, and your client hits a compliance problem again in year two or three, you want the file to show reasonable cause was live and available in year one. That protects your client’s future relief options.

Flag reasonable cause as the permanent fallback. Clients who don’t qualify for AEP, or whose situation involves facts beyond a clean compliance history, still have the reasonable cause path. That analysis, and your documentation obligation around it, does not go away. If anything, it becomes more important as AEP absorbs the easy cases and leaves the harder ones for you to argue on the merits.

This is a real simplification for the majority of compliant taxpayers, and the IRS deserves credit for finally automating a benefit practitioners have pushed for years. But automatic relief is not unsupervised relief. Confirm the IRS applied AEP where it should have. Catch the returns it doesn’t cover. Preserve reasonable cause arguments even when AEP looks like it resolved the issue because the IRS’s own advocate has already told us the interaction between these two forms of relief remains unfixed.