The IRS has administered “First Time Abate” since 2001.[1] This is an administrative waiver of certain penalties if there is at least three years of prior tax compliance. However, the taxpayer (or their representative) needed to request its application. Now, the IRS has made First Time Abate automatic. Effective beginning with the 2025 tax year and the 2026 quarterly returns (so a Form 941 for a quarter in 2025 would not apply), the newly renamed “Automatic Exemption from Penalty” will operate under the same rules as First Time Abate, except that a penalty eligible for automatic exemption would simply not be assessed at all, and without the taxpayer’s intervention.
The waiver is available for individual tax returns, partnership tax returns, S corporation tax returns, C corporation tax returns, and payroll tax returns. To qualify, the taxpayer must have timely filed the return for the prior 3 tax years without a penalty. If so, the failure to file, failure to pay, and the failure to deposit penalty will be waived, as applicable, regardless of penalty amounts. Although the waiver should occur automatically, the IRS makes mistakes and might not always do so. As seen, the Automatic Exemption from Penalty (AEP) is limited to one waiver for every three years. In contrast, a waiver for reasonable cause (generally for extenuating circumstances such as illness) can be made any number of times. So, if both the AEP and the reasonable cause waiver apply, it is better to preserve the AEP and use the reasonable cause waiver instead (which is not automatic). Reasonable cause can generally be used as a defense to far more forms than AEP can as well. AEP notably does not include information returns, regardless of their obscurity. If you received a penalty but had reasonable cause, please contact (916) 822-8700 for assistance.
[1] IRM 20.1.1.3.3.2.1.