IRS Penalty Notice? The New Automatic Exemption May Erase It

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Seeing an IRS penalty notice can make your stomach drop. You may be wondering: How much do I owe? Did I make a mistake? What happens next?

Take a deep breath. You may have options.

This summer, the IRS introduced a new Automatic Exemption from Penalty (AEP) program for taxpayers with a strong history of timely compliance. In certain situations, AEP can prevent failure-to-file, failure-to-pay, and failure-to-deposit penalties from being assessed at all.

And if you already received a notice, you may still qualify for relief through the transition from the IRS’s former First Time Abate program.

At Oasis Tax Advisory Services, we provide compassionate, judgment-free IRS tax relief services and tax resolution services. We’ll help you understand what the notice means, check your eligibility, and determine the most practical next step.

Relief may happen automatically

The new AEP program is designed for taxpayers who generally do the right thing but experience one late filing, late payment, or late tax deposit.

If you qualify, the IRS applies the exemption during original return processing. You do not need to:

Submit an application
Call the IRS
File a separate form
Ask the IRS to consider AEP

The IRS should send you a notice explaining that the penalty was not assessed because of your prior timely compliance.

AEP currently applies to eligible returns, including certain Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. It begins with 2025 tax-year returns, 2026 quarterly returns, and later eligible periods.

However, AEP is not a free pass to ignore tax deadlines. You are still responsible for filing required returns, paying the underlying tax, making deposits, and meeting other reporting obligations.

The key requirement: three years of timely compliance

To qualify for AEP, the IRS generally looks at your history for the prior:

Three tax years for annual returns, or
Twelve consecutive quarters for quarterly filers

The same type of return must generally have been filed on time. You must also have paid the tax due on time and maintained a qualifying penalty history.

In plain English, AEP is intended for someone who has been consistently compliant and then has a one-time issue, not for repeated late filings or ongoing unpaid tax obligations.

For many taxpayers, the IRS will look for:

Timely filing of the same return type for the prior three years or 12 quarters.
No assessed penalties, except estimated tax penalties, or penalties that were later removed because of reasonable cause or IRS error.
For businesses, additional compliance with federal tax deposit requirements.

Business taxpayers may face extra requirements. For example, the IRS considers whether failure-to-deposit penalties were waived four or more times during the prior three years or 12 quarters. The IRS also excludes certain failure-to-deposit situations involving avoidance of the Electronic Federal Tax Payment System.

Eligibility depends on your IRS account history. We can help review the details rather than leaving you to interpret confusing IRS records on your own.

What AEP can, and cannot, remove

When AEP applies, it may prevent these penalties from being assessed:

Failure-to-file penalties: for submitting a required return after its deadline
Failure-to-pay penalties: for not paying tax shown on a return by the due date
Failure-to-deposit penalties: for not depositing certain payroll or other required taxes on time

But AEP does not eliminate every amount on an IRS account. You may still owe:

The underlying tax
Interest
Accuracy-related penalties
Information reporting penalties
Daily delinquency penalties
Other penalties not covered by AEP

AEP also does not cover estimated tax underpayment penalties. That distinction matters for business owners, self-employed individuals, investors, and high earners who do not have enough tax withheld throughout the year.

Already received a penalty notice? You may still have choices

AEP is applied during original return processing. That means it is different from asking the IRS to remove a penalty after a notice has already been issued.

If you already received a notice, do not assume the amount is final. During the transition, some taxpayers may still qualify for First Time Abate (FTA) relief.

FTA has traditionally helped taxpayers with a clean compliance history receive relief from certain penalties. Unlike AEP, however, FTA requires you to contact the IRS and request the relief.

You may be able to request FTA by:

Calling the phone number on your IRS notice
Sending a written request
Filing Form 843, Claim for Refund and Request for Abatement, when appropriate

We can review the notice, check the applicable tax period, and help determine whether FTA, reasonable-cause relief, or another resolution strategy may apply.

FTA is being replaced for future returns

The IRS is transitioning away from First Time Abate and replacing it with AEP.

FTA remains available for certain transition-period returns, including eligible:

2024 tax-year returns
2025 quarterly returns
2025 tax-year returns processed before AEP began
2026 quarterly returns processed before AEP began

For original returns with due dates on or after January 1, 2027, FTA will no longer be available. AEP will be the applicable automatic relief process for eligible taxpayers.

This change makes compliance history even more important. Keeping returns filed, taxes paid, and deposits made on time can help protect you from certain penalties if an unexpected problem occurs later.

Don’t overlook the September 15 estimated tax deadline

For many individuals, high earners, self-employed taxpayers, corporations, and business owners, September 15, 2026, is the third-quarter estimated tax payment deadline.

If you do not pay enough through withholding and estimated payments, the IRS may assess an estimated tax underpayment penalty. This can happen even if you pay your full balance when you file your tax return.

AEP generally does not remove this type of penalty.

Before the deadline, we can help you:

Estimate your current-year tax liability
Review income from your business, investments, or other sources
Compare withholding with quarterly payments
Determine whether a safe harbor may apply
Plan a payment that fits your current financial situation
Address an existing estimated tax penalty

The IRS third-quarter tax calendar lists September 15 as the due date for the third installment of 2026 estimated tax for individuals and corporations. You can also review the IRS’s estimated tax guidance.

We can help you find a clear path forward

Tax problems become more stressful when you are trying to solve them alone. You may not know whether to pay the notice, dispute it, request an abatement, or wait for an IRS response.

That is where we come in.

Our tax resolution services can help with:

IRS penalty notices
First Time Abate requests
Reasonable-cause penalty abatement
Unpaid tax balances
Late or missing returns
Payroll tax and deposit concerns
Estimated tax penalties
IRS correspondence and account reviews
Ongoing compliance planning

We will listen first, explain your options in plain English, and help you avoid unnecessary steps. Our goal is not simply to remove a penalty. It is to help you understand what caused the issue and create a plan that makes future compliance easier.

You are not a bad person because you received an IRS notice. Tax problems happen. We’ve got you.

Frequently asked questions

Does AEP erase an IRS penalty notice I already received?

Not automatically. AEP is generally applied during original return processing before certain penalties are assessed. If you already received a notice, you may still qualify for First Time Abate during the transition or request relief based on reasonable cause.

Do I need to apply for the Automatic Exemption from Penalty?

No. If you qualify for AEP, the IRS applies it automatically. You do not need to call, submit an application, or respond to the IRS notice confirming the exemption.

Does AEP eliminate the tax I owe?

No. AEP only addresses certain penalties. You remain responsible for the underlying tax, interest, and penalties that are not covered by the program.

What if I have late filings or penalties in the last three years?

You may not qualify for AEP, depending on the type and history of the penalties. However, other relief may be available, including reasonable-cause relief. We can review your records and explain what options may fit.

Does AEP cover estimated tax penalties?

Generally, no. Estimated tax underpayment penalties are separate from the failure-to-file, failure-to-pay, and failure-to-deposit penalties covered by AEP.

Can Oasis Tax Advisory Services contact the IRS for me?

Yes. When appropriate, we can help prepare a relief request and represent you before the IRS with proper authorization. We can also help you respond to notices and organize the information needed for a resolution.

You do not have to face the IRS alone

A penalty notice does not automatically mean you have no options. The new AEP program may protect eligible taxpayers with a strong compliance history, while FTA and reasonable-cause relief may help taxpayers who already received a notice.

If you are unsure what applies, we can help you sort it out without judgment. Visit the Oasis Tax Advisory Services Learning Center for more guidance, or visit myoasistax.com to book a conversation with our team.

Bring the notice, your questions, and whatever information you have. We’ll take it one step at a time.

Got a Tax Penalty Notice? The IRS’s New Automatic Exemption Could Erase It

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