Received an IRS Penalty Notice? Key Points Taxpayers Should Know About the New Penalty Relief Rules Starting in 2026

When filing U.S. tax returns, many taxpayers experience anxiety when they receive a notice from the IRS (Internal Revenue Service).

Common concerns include:

• “Do I need to pay additional taxes?”
• “Has a penalty been assessed?”
• “Do I need to contact the IRS?”

Receiving an IRS notice can be stressful, and many taxpayers become worried before fully understanding what the notice means.

However, IRS penalties vary depending on the situation, and in certain cases, taxpayers may qualify for penalty relief or a reduction of penalties.

In 2026, the IRS announced changes to its penalty relief procedures and introduced a new program called Automatic Exemption from Penalty (AEP).

This article explains the new penalty relief system beginning in 2026, how it differs from the traditional First Time Abate (FTA) program, who may qualify, and important considerations for Japanese taxpayers living in the United States who have foreign assets.

What Is IRS Penalty Relief?

IRS Penalty Relief is a program that allows certain penalties resulting from late filing of tax returns or late payment of taxes to be removed or reduced if specific requirements are met.

When filing tax returns, taxpayers may face various types of penalties, including the following:

Failure to File Penalty
A penalty imposed when a taxpayer fails to file a required tax return by the due date.

Failure to Pay Penalty
A penalty imposed when a taxpayer fails to pay the tax due by the required payment deadline.

Failure to Deposit Penalty
A penalty imposed when required tax deposits, such as payroll tax deposits, are not made in the correct amount or by the required due date.

However, the IRS does not automatically waive penalties in every situation.

When determining whether penalty relief is available, the IRS considers factors such as the taxpayer’s Compliance History (past filing and payment history) and the specific circumstances that caused the delay.

From First Time Abate (FTA) to Automatic Exemption from Penalty (AEP)

Historically, the most commonly used IRS administrative penalty relief program has been First Time Abate (FTA).

FTA allows taxpayers with a history of timely filing and payment compliance for the prior three years to request relief from certain penalties.

However, to receive FTA relief, taxpayers were required to contact the IRS and request that the penalties be removed.

Beginning in the summer of 2026, the IRS will introduce a new program called Automatic Exemption from Penalty (AEP), which changes how this relief is provided.

Under AEP, when the IRS processes a tax return, it will review the taxpayer’s Compliance History. If the taxpayer meets the eligibility requirements, the IRS will not assess the applicable penalties in the first place.

In other words, eligible taxpayers will no longer need to contact the IRS or submit a separate request for penalty relief.

Tax Returns Eligible for Automatic Exemption from Penalty (AEP)

AEP does not apply to all types of tax returns.

The main return types identified by the IRS as eligible for consideration under AEP include:

• Form 1040 (Individual Income Tax Return)
• Form 1065 (Partnership Return)
• Form 1120 (Corporation Income Tax Return)
• Form 940, Form 941, and other Payroll Tax Returns

This program applies not only to individual taxpayers but also to businesses and business owners.

In particular, owners of S Corporations and Partnerships may be affected by this change, as it may impact penalties related to business tax filings and payroll tax reporting.

Requirements to Qualify for Automatic Exemption from Penalty (AEP)

To qualify for AEP, taxpayers must have a history of timely tax compliance.

The general requirements include:

• Filing the same type of tax return on time for the prior three years (or the prior 12 consecutive quarters for quarterly filers)
• Paying any tax due by the required deadlines
• Having no significant penalty history, except for penalties that were previously removed due to Reasonable Cause or IRS Error

In other words, taxpayers who are late for the first time but have consistently fulfilled their tax filing and payment obligations in previous years may qualify for AEP.

AEP Does Not Eliminate the Tax Liability

It is important to understand that AEP does not eliminate the underlying tax liability.

The relief provided under AEP applies only to certain eligible penalties.

Therefore, taxpayers are still responsible for paying:

• Unpaid tax liabilities
• Interest
• Penalties that are not eligible for AEP relief

Penalty relief does not mean that the taxpayer is no longer required to pay the taxes owed.

In other words, the removal of a penalty does not eliminate the obligation to pay the underlying tax amount.

Important Considerations for Taxpayers with Foreign Assets

Taxpayers who live in the United States and have foreign assets may have additional reporting obligations beyond their regular income tax filings.

Examples include:

• FBAR (FinCEN Form 114)
• Form 8938 (Statement of Specified Foreign Financial Assets)
• Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)
• Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner)

These international information reporting requirements are subject to different rules from standard income tax returns.

The newly announced AEP program primarily applies to certain tax returns, such as Form 1040 and business tax returns, and does not automatically provide penalty relief for penalties related to foreign asset reporting requirements.

Penalties associated with forms such as Form 3520 and FBAR can be substantial. Therefore, when a taxpayer receives an IRS Notice, it is important to carefully identify the type of penalty involved and determine whether separate penalty relief procedures may apply.

Reasonable Cause Relief May Still Be Available Even If You Do Not Qualify for AEP

If a taxpayer does not meet the requirements for AEP, it does not necessarily mean that penalty relief is unavailable.

The IRS continues to provide penalty relief based on Reasonable Cause in certain situations.

Examples of circumstances that may be considered for Reasonable Cause relief include:

• Natural disasters
• Serious illness
• Death of the taxpayer or an immediate family member
• Inability to obtain necessary records
• Issues with electronic filing systems

On the other hand, the following reasons alone are generally not considered sufficient for penalty relief:

• Lack of knowledge of tax laws
• Simple mistakes or oversights
• Reliance on a tax professional

When requesting Reasonable Cause relief, it is important for taxpayers to explain what steps they took to comply with their tax obligations and the specific circumstances that prevented them from filing or paying on time.

What to Check When You Receive an IRS Notice

If you receive a notice from the IRS, it is important to carefully review the following points:

1. What type of penalty is involved?
2. Which tax return or filing requirement does the penalty relate to?
3. Could you qualify for AEP or First Time Abate (FTA)?
4. Is penalty relief available based on Reasonable Cause?
5. What is the deadline for responding to the IRS?

Ignoring an IRS Notice may result in additional problems or further enforcement actions.

However, receiving an IRS Notice does not always mean that you must immediately pay the penalty as assessed.

It is important to review your specific circumstances and determine whether any available penalty relief options may apply before taking action.

Summary

The introduction of Automatic Exemption from Penalty (AEP) in 2026 represents a significant change for taxpayers who have consistently filed returns and paid taxes on time.

Under the traditional First Time Abate (FTA) program, taxpayers were required to contact the IRS and request penalty relief. Under AEP, however, eligible taxpayers will receive automatic relief, and the IRS will not assess certain penalties if the required conditions are met.

However, not all penalties are covered under AEP.

In particular, penalties related to international information reporting requirements, such as FBAR and Form 3520, generally require separate consideration and may continue to require penalty relief requests based on Reasonable Cause or other applicable procedures.

If you receive an IRS Notice, it is important not to immediately assume that you must pay the assessed penalty. Before taking action, carefully review the type of penalty involved and determine whether any available penalty relief options may apply to your situation.