If the IRS Just Hit You With a Penalty for a 2025 Return, Don't Pay Yet

If you got an IRS penalty notice this week for a 2025 return you filed late or paid late, don’t cut the check yet. The rule that wipes that penalty for a lot of people just became automatic, but the system is not always catching it on the way out.

The IRS announced the Automatic Exemption from Penalty (AEP) on July 8 in IR-2026-83. AEP replaces First Time Abate, the quiet rule the IRS has offered for years to anyone with a clean record who slipped up once. Under the old system, you had to know the rule existed and call to ask. Most people did not. The National Taxpayer Advocate put it plainly: “Relief should not depend on a taxpayer’s income, ability to reach the IRS by phone, or access to professional representation.”

Now, if you qualify, the IRS is supposed to apply the relief before the penalty ever leaves the building.

Here’s the catch. AEP is phasing in this summer for 2025 individual returns and 2026 quarterly business returns. Full replacement of First Time Abate does not kick in until January 1, 2027 for later filings. During the transition, the IRS itself has warned that some qualifying taxpayers may still receive penalty notices for 2025 returns. If you get one, the relief is still yours. You just have to ask for it.

What is at stake. The Failure to File penalty is 5% of unpaid tax per month, capped at 25%. The Failure to Pay penalty is 0.5% per month. On a $10,000 tax bill filed three months late, the Failure to File charge alone is $1,500. That is what AEP wipes if you qualify, on top of the underlying tax. Interest still runs.

You qualify if you filed on time and paid any tax due for the three prior years. For quarterly business filers, that is 12 consecutive clean quarters. Failure to file, failure to pay, and failure to deposit are the three penalties in scope.

Do this now if a notice showed up. Read it. Find the toll-free number, call, and say you want to request First Time Abate under the transition to AEP. Have the notice, your Social Security number or EIN, the tax year, and a summary of your last three years of filings in front of you. It is a short call. The agent runs the check on the spot.

If the agent tells you the relief is unavailable, ask why. Failure to reach a live person on the first try is normal. Call back the next morning at 7 a.m. Eastern when the lines open. The three-year clean record is a bright line: if you have it, keep pushing.

If you do not qualify for AEP, you can still ask for penalty relief for reasonable cause. That is a longer conversation and it requires a written explanation, but it exists. Illness, natural disaster, a death in the family, records destroyed. The IRS reviews those on the merits.

Here’s what they don’t tell you loudly. AEP is not retroactive to prior years automatically. If you paid a First Time Abate penalty in 2023, 2024, or 2025 that you could have gotten wiped by calling, that money is not coming back on its own. You can still call and request an abatement of what you already paid. The burden is on you.

File this away if your last three years are clean and nothing landed in the mailbox this week. The change is real, and it is quiet on purpose. The Failure to Pay note that used to feel inevitable is often not.

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