IRS Automatic Penalty Relief: What Changes in 2027

You missed a payroll deposit by four days because a client paid you two weeks late. Or you filed your S-Corp return a month past the deadline because the books weren't caught up yet. Either way, the penalty notice showed up right on schedule, and unless you specifically knew to ask for something called "first-time penalty abatement," you probably just paid it.

The IRS just changed that.

So what exactly is this automatic penalty relief?

The IRS is rolling out the Automatic Exemption from Penalty, or AEP, this summer, replacing the old First-Time Abate program. If you've filed and paid on time for the past three years, or 12 straight quarters as a quarterly filer, the IRS will waive failure-to-file, failure-to-pay, and failure-to-deposit penalties automatically. No request required.

How IRS automatic penalty relief actually works

The old system put the burden on you. First-Time Abate existed, and it worked, but only if you knew the exact phrase to use when you called, and only after the penalty had already posted and probably already scared you.

AEP flips that. The IRS checks your compliance history on its own: have you filed and paid on time for the three prior years, or for the last 12 consecutive quarters if you're a quarterly filer? For an S-Corp owner running payroll through Gusto, that's your 941 deposits. For a freelancer or sole owner, that's your quarterly estimated payments. If that history is clean, a slip now, one late deposit, one late return, gets the penalty waived without you lifting a finger.

What's covered, and what still isn't

Covered:

• Failure-to-file penalty

• Failure-to-pay penalty

• Failure-to-deposit penalty (payroll tax deposits)

Not covered:

• Information returns, like 1099s and W-2s

• Infrequent filings, like Form 706 (estate tax) or Form 709 (gift tax)

• The tax and interest you actually owe

That last one matters. AEP waives the penalty. It doesn't touch the tax itself, and it doesn't touch interest, which keeps accruing whether the penalty gets forgiven or not.

The gap most people are going to fall into

Here's the part that'll trip people up. AEP is built for returns with original due dates on or after January 1, 2027. If you've got a penalty notice sitting in your inbox right now from a 2025 or early-2026 return, this program doesn't automatically reach back and fix it. You'd still need to call and request the manual, old-fashioned First-Time Abate.

The IRS's own numbers show why that gap matters: it estimates that if AEP had been running in fiscal 2025, more than 1.5 million taxpayers would have gotten relief. Under the old manual process, roughly 220,000 did. That's over a million people who likely qualified and never got the waiver, probably because they never knew to ask.

In practice, that's always been the real failure point. It was never that people didn't qualify for First-Time Abate. It's that a penalty notice reads like a final bill, not a mistake worth contesting, so most owners just pay it and move on. AEP is the IRS finally admitting that's a design flaw on their end, not a compliance failure on yours.

If you're holding a penalty notice right now and you're not sure whether you already qualify for relief or whether you need to pick up the phone yourself, that's exactly the kind of two-minute call versus quietly-overpaying situation where a second set of eyes is worth it. Staying current on your books is what builds the clean history AEP is checking for in the first place, and that's the whole logic behind catching bookkeeping up before it piles up.

The takeaway

If your filing and payment history is clean, you're already building toward automatic protection for anything due starting in 2027. If you're sitting on a notice from before that, don't assume AEP already covers it. It doesn't yet, and the ask is still on you.

If you want your compliance history checked before this rolls out, or you're staring at a notice and aren't sure which side of the 2027 line it falls on, book a quick consult and we'll sort it out.

This post is general information, not tax or accounting advice for your specific situation. Penalty relief eligibility depends on your exact filing history and the type of return involved. Talk to a CPA (ideally us) before you assume you're covered.