For years, when the IRS hit your business with a penalty for filing or paying late, you had to ask to have it removed — usually by calling, writing, or citing a “First-Time Abate” rule most owners had never heard of. That is changing. The IRS has announced automatic penalty relief, and for a lot of Crescenta Valley small businesses it means a penalty you would once have paid — or fought for months to reverse — may now come off on its own.
What’s changing
The IRS is replacing its long-standing First-Time Abate (FTA) program with a new one: the Automatic Exemption from Penalty (AEP). The name is the whole point. Where FTA made you request relief, AEP is applied for you — the IRS says eligible taxpayers “do not need to take action to receive this relief,” and it will issue a notice confirming the relief was granted.
It covers the three penalties that land on small businesses most often:
- Failure to file — the return itself is late.
- Failure to pay — the return is filed, but the tax isn’t paid on time.
- Failure to deposit — the one that stings employers most: a payroll tax deposit misses its date.
Who qualifies
AEP is for businesses — and individuals — with a clean recent record. You qualify if you have a history of filing on time and paying any tax due for the three prior years, or, for quarterly filers like most employers, the 12 consecutive prior quarters. Put another way: the quiet compliance history you’ve been building is now an asset the IRS will spend on your behalf the first time you slip.
When it takes effect
The IRS begins phasing AEP in during summer 2026. It applies to eligible original returns starting with tax year 2025 and 2026 quarterly returns, plus future periods, and it fully replaces First-Time Abate for returns with original due dates on or after January 1, 2027. During the transition, if you were already planning to request First-Time Abate on a recent penalty, that path still works.
If you don’t qualify
Miss the clean-history test — say you had a late deposit two years ago — and AEP won’t fire automatically. You can still request relief based on reasonable cause (serious illness, a disaster, records lost in a fire), which the IRS reviews case by case. That door has always been there; AEP simply adds an automatic lane in front of it. If a penalty notice does arrive, our guide to IRS and FTB letters walks through reading it before you respond.
If you get an IRS penalty notice this year, don’t assume you have to pay it — and don’t panic-call a “tax resolution” firm. If your last three years are clean, relief may already be on the way automatically. If they’re not, a reasonable-cause request is still worth making. Either way, read the notice before you send a dollar.
Action items
- If a penalty notice arrives, check whether your last three years (or 12 quarters) of filings were on time before paying anything.
- Watch for a follow-up IRS notice confirming AEP relief was applied — keep it with your records.
- Employers: failure-to-deposit is the penalty AEP most often erases — protect the streak by keeping payroll deposits on schedule.
- Don’t pay a third party to “remove” a penalty that may come off automatically for free.
- Not sure whether you qualify? A quick look at your compliance history answers it.
This article is general information, not tax advice for your specific situation. Rules change and details matter — talk to a CPA (we know one) before acting on anything here.