Is IRS Penalty Relief Automatic in 2026? Here's How to Tell What Applies to You

By Forrest Baumhover, CFP®, EA · Last verified August 28, 2026

If a penalty notice landed in your mailbox this year, you've probably seen someone say the IRS just made penalty relief "automatic." That's true, but only in a narrow, specific way — and if your notice falls outside that window, you still have to ask for relief yourself. This page walks through which path applies to you: automatic relief, First-Time Abate, or reasonable cause, and what separates them.

Is Penalty Relief Really Automatic Now?

On July 8, 2026, the IRS announced a new program called Automatic Exemption from Penalty (AEP) in IR-2026-83. Under AEP, if you filed and paid on time for the past three years — or 12 consecutive quarters if you file quarterly — the IRS suppresses certain penalties before it even assesses them, starting with 2025 tax year returns and 2026 quarterly filings. You don't call, you don't write a letter, you don't fill out a form. If you qualify, the IRS applies the relief and sends a letter confirming it.

Two caveats matter here. First, AEP is brand new and still rolling out — the IRS began applying it in summer 2026, and it's set to fully replace First-Time Abate for returns due on or after January 1, 2027. Some taxpayers who genuinely qualify may still get a penalty notice if their return processed before AEP caught up to it. Second, AEP does have Internal Revenue Manual authority behind it — IRM Procedural Update SBSE-20-0626-0643 (June 17, 2026) added it as IRM 20.1.1.3.3.2.5 — but that's interim guidance: it binds the IRS employees who process your return right now, and the public IRM page online hasn't absorbed it yet, so if you or a representative look up "20.1.1.3.3.2.5" on irs.gov today, you won't find it there.

AEP also only covers specific penalties — failure-to-file, failure-to-pay, failure-to-deposit — on specific return types (Forms 1040, 1065, 1120, and the 94x employment tax series, among others). It doesn't erase every penalty, and it never touches interest.

So here's the real question: did AEP already cover you, or do you still need to ask?

Three Paths Out From Under a Penalty — Which One Is Yours

1. Automatic Exemption from Penalty (AEP) — you don't do anything

The clearest sign is the notice itself. AEP suppresses a penalty before the IRS ever bills you for it — so if you were covered, the IRS doesn't send a bill, it sends a letter saying so: CP95 (or CP95(SP) in Spanish) if you're an individual, or CP195B (or CP895B) if you're a business. If you have one of those in hand, AEP already applied — you don't need to do anything else to confirm it.

No letter, and not sure? If you have an IRS online account, there's an optional deeper check: look at your account transcript for an unreversed TC 971 with Action Code 996 — that's the internal code the IRS posts when AEP is granted, and it's a different code from the ones tied to a penalty someone had to request relief from (below). You don't need a transcript to use this page, though — most people never pull one, and the notice is the primary way to know.

2. First-Time Abate (FTA) — you have to ask, but the bar is low

If AEP hasn't caught your situation yet — common right now, since the rollout is still in progress — First-Time Abate is the fallback. FTA is a longstanding IRS administrative policy (IRM 20.1.1.3.3.2.1) that waives failure-to-file, failure-to-pay, and failure-to-deposit penalties for taxpayers with a clean three-year compliance history — the same basic test AEP uses. The difference is FTA isn't automatic. You have to call the IRS or send a written request, even if you'd clearly qualify.

3. Reasonable cause — no clean history required, but you need a real reason

No three clean years behind you? First-Time Abate isn't available, but you're not out of options. Reasonable cause (IRM 20.1.1.3.2) lets you argue the penalty shouldn't apply because something specific and documentable got in the way of filing or paying on time — a serious illness, a natural disaster, reliance on a professional's bad advice, records destroyed in a fire or flood, or something similarly outside your control. The IRS decides these case by case. Vague explanations ("I was busy," "I forgot") don't succeed. Specific, documented ones do.

What None of These Paths Do

None of AEP, FTA, or reasonable cause touches the tax you owe or the interest that's accrued on it — only the penalty itself. Under IRC §6651, failure-to-file runs up to 25% of the unpaid tax and failure-to-pay adds on top of that. Relief removes the penalty; it doesn't erase the underlying bill.

Common Questions

Where This Leaves You

Once you know which path applies, you still have to make the actual request — in the right form, to the right place, with language that holds up. That's exactly where generic advice online tends to stop.

After You Ask

Whichever path you use, the outcome shows up on your transcript — but which code you'll see depends on the path. If you went the AEP route, look for an unreversed TC 971 with Action Code 996, not TC 161 or TC 167 — AEP suppresses the penalty before it's assessed, so there's nothing for those two codes to abate. If you filed a First-Time Abate or reasonable-cause request yourself, TC 161 means the IRS reduced or removed a Failure to File penalty by a specific dollar amount someone decided on — the actual code that kind of request produces. TC 167 is different: it's a systemic recalculation, not by itself proof that relief was granted. If a request gets denied, the notice explains why, and in many cases you can appeal.