The IRS just made a change that could put money back in a lot of pockets, and it happened with almost no noise at all. Starting this summer, if you file your taxes a little late or come up short on a payment, the agency might just let it slide. No begging. No phone calls. No filling out a form you never knew existed. If you have a clean track record, the penalty simply won’t show up.
That is a real shift from how things have worked for the last 25 years, and most people have no idea it is coming. Here is what actually happened and whether it affects you.
What the IRS Actually Changed
On July 8, 2026, the IRS announced a new program called Automatic Exemption from Penalty, or AEP for short. The name is a mouthful, but the idea is simple. If you normally pay on time and file on time, the IRS will stop hitting you with certain penalties when you have an off year. And it does this on its own, while your return is being processed.
The penalties it covers are the three that trip people up most: failure to file, failure to pay, and failure to deposit. Instead of assessing them and waiting for you to argue, the IRS just skips the penalty and mails you a notice saying it did. You do not need to respond to that notice or call anyone. IRS CEO Frank Bisignano put it plainly, saying taxpayers who historically pay on time “should not have to make a formal request for relief that is routinely granted.”
The rollout starts with tax year 2025 returns and 2026 quarterly returns, then rolls forward from there.
Do You Actually Qualify?
Not everybody gets this. The whole thing rides on your history. To qualify, you generally need to have filed the same type of return on time and paid what you owed for the three prior years. If you file quarterly, the lookback is 12 straight quarters instead.
So this is really built for the person who does everything right year after year and then hits a rough patch. Maybe you lost a tax document, went through a divorce, dealt with a family emergency, or just plain forgot to hit submit. One late year no longer costs you if the three before it were clean. According to the IRS guidance, the relief kicks in once your original return finishes processing.
The forms that count include the big ones most people and small businesses file: Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. Estate and gift tax returns, the 706 and 709, are left out. So are information returns and one-off filings tied to rare events.
The Part Nobody Wants to Hear
Let me stop you before you get too excited. This does not wipe out your tax bill. AEP kills the penalty, not the debt. You still owe every dollar of tax you didn’t pay, plus interest, plus any penalty that doesn’t fall under the program.
That interest matters more than people think. The failure-to-pay penalty runs 0.5% of your unpaid tax each month, capped at 25%. The failure-to-file penalty is much worse at 5% a month, also capped at 25%. And if you file more than 60 days late, there is a minimum penalty that sits at $525 for 2026 filings. Getting those wiped is a genuine win. But do not treat AEP as a free pass to ignore your taxes. The bill still comes.
The Old System Was Basically a Secret Handshake
Here is why this change actually matters. The program it replaces, First Time Abate, has been around since 2001. It offered the exact same kind of relief for people with a clean record. The catch? You had to know it existed, and you had to ask for it. Usually that meant a written statement or a Form 843, and often a call to the IRS that could eat up your afternoon.
The rules for First Time Abate were buried in the Internal Revenue Manual, the internal handbook IRS staff use. Regular people were never really told. So the folks who got the break tended to be the ones who could afford an accountant to make the request for them. Everyone else just paid.
The numbers show how lopsided that was. In fiscal year 2025, about 220,000 taxpayers got First Time Abate relief through the manual process. The Taxpayer Advocate Service estimates that over 1.5 million would have qualified if it had been automatic. That is roughly seven times as many people. In other words, more than a million qualified taxpayers a year were leaving money on the table simply because they never knew to ask.
Business Owners Get a Little Extra
If you run a business, this one is worth paying attention to. For individuals, AEP blocks the failure-to-file and failure-to-pay penalties. For eligible businesses, it also blocks the failure-to-deposit penalty, which is the one that stings employers who fall behind on payroll tax deposits.
There is a catch built in to stop abuse. The IRS won’t apply the relief if it already waived your failure-to-deposit penalty four or more times in that lookback window, or if the penalty was tied to dodging the electronic payment system. So a business that keeps stumbling on deposits does not get to lean on this forever. It is meant for the reliable operator who has one bad stretch, not the repeat offender.
Watch Your Mail During the Switch
The changeover is not instant, and that is where people could get tripped up. The IRS is phasing out First Time Abate during summer 2026, and AEP fully takes over for eligible returns with due dates on or after January 1, 2027.
During this in-between stretch, some people with eligible 2025 returns or 2026 quarterly returns might still get a penalty notice, especially if their return was processed before the new system was fully switched on. If that happens to you and you think you qualify, do not just pay it. Call the number on the notice and ask for First Time Abate. The relief is still available the old way during the transition.
National Taxpayer Advocate Erin Collins also flagged a smart wrinkle. If you have a genuine excuse that would qualify as “reasonable cause,” the IRS should use that first and save your automatic relief for a future year. Otherwise you burn your AEP now and have nothing left when you really need it. If you use a tax pro, that is a conversation worth having.
The Quieter Move That Went the Other Direction
While the IRS was handing out easier penalty relief with one hand, it took something away with the other, and it did it without a single press release. On July 1, 2026, the agency quietly deleted the Delinquent FBAR Submission Procedures from its website. The page that had been up for years just turned into “Page Not Found.”
If you have never heard of an FBAR, it is the report you file if you have foreign bank accounts over a certain balance. The old procedure let people who simply forgot to file that report catch up without a penalty, as long as they had reported all their income and paid their taxes. That safe path is now gone. The IRS now says only that penalties “will not be imposed automatically” and that each case gets judged on its own facts.
That is a big deal because FBAR penalties are steep. A non-willful violation can run up to $16,536 per report per year. A willful one can reach $165,353 or half the account balance, whichever is larger. These compliance programs exist only because the IRS created them, so the agency can pull them at any time. Anyone with a missed foreign account report should think carefully before filing on their own now.
What You Should Actually Do
For most regular filers, the good news is that you do not have to lift a finger. If you qualify for AEP, the IRS finds you and applies it. Your job is just to keep an eye out for that notice so you know it worked.
If you get a penalty bill for a 2025 or 2026 quarterly return and you have a clean three-year history, don’t assume the computer got it right during the messy transition. The relief may still apply, so call the number on your notice and ask. A five-minute phone call could erase a penalty that would have cost you real money under the old system.
The takeaway is simple. If you are the type who pays on time, the IRS is finally cutting you a break without making you jump through hoops. And if you have overseas accounts you never reported, the window that used to protect you just closed. Two moves, same week, and hardly anyone noticed either one.