IRS Replaces First Time Abate Program

The IRS announced a new administrative penalty relief program, the AEP program. The AEP program automatically will prevent assessment of certain penalties for taxpayers with a recent history of timely filing and payment and is expected to begin in summer 2026. The AEP will apply to eligible original returns beginning with tax year 2025 and 2026 quarterly returns. Taxpayers that previously would have needed to request relief under the FTA program will, if eligible, receive comparable relief automatically during processing, which should reduce notices, the need to contact the IRS to request relief, and the administrative burden while standardizing relief for similarly situated taxpayers. The IRS plans to phase out the FTA program and replace it with the AEP program for eligible returns with original due dates on or after Jan. 1, 2027.

Background

The IRC provides the IRS authority to waive or abate penalties if a taxpayer shows it has reasonable cause for the failure. The FTA program long has been the IRS’ most common form of administrative penalty relief for taxpayers with a favorable recent compliance history. A favorable compliance history meant not having similar penalties for the three tax periods preceding the year for which relief was sought. The FTA program only applies to a select group of penalties and a select group of returns. For instance, the FTA program is available for failure-to-file and failure-to-pay penalties on a Form 1040, “U.S. Individual Income Tax Return,” or Form 1120, “U.S. Corporation Income Tax Return,” but not on a Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return,” or Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return.” The FTA program also is unavailable for information reporting penalties under Section 6721 and Section 6722.

The FTA program requires a taxpayer or taxpayer’s representative to recognize the issue and affirmatively request relief (either by writing a letter or calling the IRS) after a penalty had been assessed or proposed. The AEP program shifts that model from taxpayer-requested relief to systemic, automatic relief applied during processing, reducing the burden on taxpayers and their advisers and freeing up IRS resources to handle other issues.

Crowe observation

The American Institute of Certified Public Accountants made several recommendations to enhance the FTA program, including expanding the program to additional penalties, allowing FTA program relief for multiple periods if the failure stems from a single error, and applying automatic relief with the ability to request reasonable cause relief instead to preserve use of the FTA program for a later date. The IRS appears to have only adopted automatic relief without the ability to request reasonable cause in lieu of automatic relief.

The new program

The AEP program is automatic. Taxpayers will not need to file a separate abatement request, and the IRS says it will send taxpayers a notice confirming that relief was granted. Reasonable cause relief might still be available for taxpayers that are not eligible for relief via the AEP program. However, the IRS did not provide a mechanism to allow taxpayers to preserve participation in the AEP program for later and request reasonable cause relief in lieu of automatic relief, though the National Taxpayer Advocate had requested such a process.

Taxpayers qualify for the AEP program if they timely filed and paid any tax due in the prior three years, or, for quarterly returns, the prior 12 consecutive quarters. The scope of relief is limited to the penalties identified in the release: failure to file, failure to pay, and failure to deposit.

Eligibility also is limited by return type. Examples of ineligible returns include information returns and returns filed only for specific transactions or infrequent events, such as Form 706 and Form 709.

The shift from the FTA program to the AEP program will be phased in over summer 2026. The IRS stated that it is possible that some taxpayers that appear to qualify for the AEP program for eligible tax year 2025 and 2026 quarterly returns still could receive penalty notices during this period. The IRS advises these taxpayers to request FTA program relief.

Crowe observation

It is unclear how the AEP program will impact relief from penalties for Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” and Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,” which are subject to a $25,000 failure-to-file penalty. Under the FTA program, IRS policy was to grant relief for Forms 5471 and 5472 attached to late filed income tax returns that qualified for FTA relief. However, the AEP guidance doesn’t address Form 5471 or Form 5472.

Looking ahead

The key change is procedural but significant: Taxpayers that previously would have needed to request relief under the FTA program will receive relief automatically. Taxpayers and practitioners should adjust penalty-review procedures for returns due in 2026 and later. However, for returns with original due dates before Jan. 1, 2027, the FTA program remains the mechanism for requesting relief, and eligible taxpayers still will need to manually request FTA relief. Taxpayers that have been assessed penalties should consult their tax advisers about whether they qualify for relief and, if so, what the best option is for requesting and obtaining relief.