In partnership with
The Future of AI in Marketing. Your Shortcut to Smarter, Faster Marketing.
Unlock a focused set of AI strategies built to streamline your work and maximize impact. This guide delivers the practical tactics and tools marketers need to start seeing results right away:
7 high-impact AI strategies to accelerate your marketing performance
Practical use cases for content creation, lead gen, and personalization
Expert insights into how top marketers are using AI today
A framework to evaluate and implement AI tools efficiently
Stay ahead of the curve with these top strategies AI helped develop for marketers, built for real-world results.
A Welcome Change, with a Catch
When I was studying to become an Enrolled Agent, one lesson stood out. Sometimes the hardest part of tax relief is not proving that a taxpayer qualifies. It is knowing that the relief exists, asking for it correctly, and following through with the IRS. A taxpayer can be entitled to a relief and still not get it because nobody requests it.
This is why the IRS’s new Automatic Exemption from Penalty, or AEP, caught my attention. For many eligible taxpayers, the IRS will now apply certain first-time administrative penalty relief automatically instead of waiting for a phone call or written request. That can mean fewer forms, fewer hours on hold, and fewer penalties paid simply because someone did not know to ask.
But automatic does not mean it always happens, and the relief does not erase the tax or every kind of penalty. The opportunity is to use the AEP as a reason to build better compliance, not as permission to relax and not become compliant. Let’s look at what changed, who may benefit, and where the problems can still appear.
Could the IRS’s New Automatic Penalty Relief Save Your Business Money, and What Could Still Go Wrong?
“Automation applied to an efficient operation will magnify the efficiency. Automation applied to an inefficient operation will magnify the inefficiency.”
— Bill Gates
Hire anyone, anywhere — compliant in under 3 days
Found the right hire, but no entity in their country? Remote becomes the legal employer — with contracts, benefits, and tax setup handled, plus direct access to the same in-house team that runs payroll locally.
What the IRS Changed
Under First Time Abate, a taxpayer with a good compliance history could ask the IRS to remove certain failure-to-file, failure-to-pay, or failure-to-deposit penalties. The relief was valuable, but someone had to recognize that they could get it and request it.
Beginning in summer 2026, the IRS started phasing in AEP. It applies to eligible original 2025 tax-year returns, eligible 2026 quarterly returns, and later periods. For original returns with due dates on or after January 1, 2027, AEP is scheduled to replace First Time Abate for eligible returns. When the IRS system determines that a taxpayer qualifies, it prevents the covered penalty from being assessed and sends a notice explaining that relief was applied.
Eligible returns include Forms 1040, 1065, and 1120 and several employment-tax returns. Generally, the taxpayer must have timely filed the same return type and paid the tax due for the prior three years, or maintained a timely history for 12 consecutive quarters for quarterly returns. Additional business rules apply.
Relief Reaches People Who Never Knew to Ask
The most obvious benefit is it’s automatically applied. Under the old process, a taxpayer might receive a notice, pay the penalty, and never learn that a clean three-year history could have supported First Time Abate. Automatic processing moves the eligibility check into the IRS system and removes much of that knowledge gap.
The National Taxpayer Advocate reported that nearly 220,000 taxpayers received First Time Abate through the manual process in fiscal year 2025. It estimated that more than 1.5 million taxpayers could have received relief if AEP had been operating for that same period. That gap shows why automation matters. Many taxpayers were apparently eligible but never completed the manual process.
For a small business, an automatic decision may reduce the cost of a routine abatement request, shorten uncertainty, and prevent interest from accumulating on a covered penalty that was never assessed.
Automatic Relief Does Not Mean Complete Relief
AEP covers only certain failure-to-file, failure-to-pay, and failure-to-deposit penalties. It does not generally cover accuracy-related penalties, information-return penalties, the Daily Delinquency Penalty, or every event-based or infrequently filed return. Estate and gift tax returns, for example, are generally outside the program. The underlying tax and interest on that unpaid tax still have to be paid.
There is also a transition problem. Some taxpayers with eligible 2025 returns or 2026 quarterly returns may still receive a penalty notice because their return was processed before AEP was available. A penalty notice therefore does not automatically prove that the taxpayer failed the eligibility test. The IRS and the Taxpayer Advocate Service both advise taxpayers to review the notice and contact the IRS when they believe AEP, First Time Abate, reasonable cause, or another form of relief may apply.
Payroll deserves special attention. Quarterly filers face a 12-quarter lookback. A business may also be ineligible if the IRS waived a failure-to-deposit penalty four or more times during that period or the penalty involved avoiding Electronic Federal Tax Payment System requirements.
Do Not Waste Administrative Relief
The National Taxpayer Advocate has pointed out a subtler concern. AEP may be applied before the IRS considers whether the taxpayer qualified for reasonable-cause relief. Suppose a taxpayer had a serious documented event that would have supported reasonable cause, but the IRS automatically used AEP instead. If another mistake occurs inside the compliance-history window and there is no reasonable cause the second time, administrative relief may no longer be available.
The relief notice should become part of the permanent tax file. If strong reasonable cause facts existed, discuss with a qualified professional whether that argument should be preserved. The relief applied today can affect what remains available later.
Replace Penalty Letters With Compliance Monitoring
The best opportunity is prevention. Abatement letters may become less common, but businesses still need to monitor filing dates, payments, payroll deposits, IRS notices, and prior relief. A favorable notice can affect future eligibility and should not simply be filed away.
A compliance log should record the return type, tax period, due date, actual filing or deposit date, penalty, and relief granted. The value shifts from writing a letter after the deadline to catching the pattern before the next deadline is missed.
This is especially useful when payroll duties are divided among an owner, bookkeeper, payroll provider, and tax professional. A short monthly or quarterly review can expose a missing confirmation before the mistake repeats.
Two Practical Steps to Take
Create a three-year penalty-relief log. Gather every IRS penalty and relief notice for the prior three years, or the prior 12 quarters for quarterly filers. Record the tax period, penalty, result, and whether relief was automatic, first time abate, reasonable cause, or correction of an IRS error. Keep the actual notices with the log.
Confirm every filing and deposit instead of assuming it happened. For payroll clients, retain the filed return acceptance, EFTPS confirmation, deposit date, and responsible person. For annual returns, track the original due date, extension, filing acceptance, balance due, and payment confirmation.
Two Mistakes to Avoid
Mistake 1: Ignoring a penalty notice because relief is “automatic.” During the transition, an eligible taxpayer may still receive an assessment. Read every notice, compare it with the account history, and respond by the stated deadline.
Mistake 2: Treating AEP as permission to file or pay late. AEP is designed for an occasional problem after a strong compliance history. It does not eliminate the underlying tax, tax interest, uncovered penalties, or the damage repeated lateness can do to future eligibility.
The Bottom Line
Automatic penalty relief is a genuine taxpayer benefit. It can put relief in the hands of people who qualify without requiring them to understand an obscure administrative procedure or spend hours requesting it. For a normally compliant small business, that is meaningful progress.
The encouraging part is that the new system also creates a reason to improve the process around every deadline. Save each notice, track the relief used, document reasonable cause facts, and verify every payroll deposit and return acceptance. Automation can remove unnecessary work, but careful monitoring is what turns a one-time break into long-term protection.
How The Smith Advisory Can Help
If you received an IRS penalty or automatic-relief notice, The Smith Advisory can help you review what the notice means, organize your compliance history, and identify questions or relief options that may deserve closer attention. Feel free to contact us at [email protected] so you can respond with a clearer understanding of the deadline, the available relief, and the steps that may help prevent the problem from repeating.
Disclaimer
This article is for general educational and informational purposes only and is not legal, tax, accounting, or financial advice. Eligibility for Automatic Exemption from Penalty, First Time Abate, reasonable-cause relief, or an appeal depends on IRS records and the taxpayer’s specific facts; consult a qualified tax professional and follow the instructions and deadlines on any IRS notice. The Smith Advisory does not guarantee that the IRS will remove or refrain from assessing a penalty.
Sources and Further Reading
Help us keep sharing real stories
▶ Know someone who’d love this? Forward it their way.