Tax penalties have existed since the early days of the U.S. income tax system. Their purpose is not primarily punitive, but administrative. The Internal Revenue Service uses penalties to encourage timely filing, accurate reporting, and prompt payment of taxes. Without penalties, the tax system would rely solely on voluntary compliance, which would make enforcement inconsistent and unfair to compliant taxpayers.
The Most Common IRS Penalties
Most IRS penalties fall into a few common categories:
- Failure-to-File penalty: Applies when a tax return is filed after the due date, including extensions
- Failure-to-Pay penalty: Applies when taxes, including required estimated tax payments, are not paid by the due date, even if the return is filed on time
- Failure-to-Deposit penalty: Common for employers who do not timely deposit payroll taxes
- Accuracy-related penalties: Imposed when a return substantially understates tax or contains negligent errors
These penalties are often assessed automatically by IRS systems rather than through audits.
What Is First-Time Abatement?
First-Time Abatement (FTA) is an administrative form of penalty relief that allows the IRS to remove certain penalties when a taxpayer with a strong compliance history experiences a one-time lapse.
First-Time Abatement generally applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. It does not apply to accuracy-related penalties or fraud-related penalties. It also does not apply to interest, which the IRS is required by law to charge and does not classify as a penalty.
Unlike reasonable cause relief, First-Time Abatement does not require the taxpayer to demonstrate hardship or provide an explanation. Eligibility is based primarily on prior compliance history.
First-Time Abatement Is Now Automatic
Beginning in 2026, the IRS plans to transition First-Time Abatement from a taxpayer-requested relief to an automatic process for qualifying taxpayers. This update does not expand eligibility; It only changes how the relief is applied.
Automatic First-Time Abatement applies to both individuals and business entities, including corporations and employers. Eligibility is determined at the taxpayer or entity level and is based on compliance history, not ownership structure or size. To qualify, the taxpayer or entity generally must have no penalties assessed for the prior three tax years, must have filed all required returns or valid extensions, and must have paid any tax due or have an approved payment arrangement in place.
For flow-through entities such as partnerships and S corporations, eligibility is evaluated at the entity level and applies only to penalties the entity itself is subject to, such as failure-to-file or failure-to-deposit penalties. Partner- or shareholder-level penalties are evaluated separately.
When applicable, the penalty reduction will generally appear directly on the taxpayer’s IRS notice or account transcript.
Historically, many taxpayers who were eligible for First-Time Abatement never received it simply because they did not know to ask. Under the new approach, the IRS will automatically review eligibility when a qualifying penalty is assessed and apply the abatement without requiring a phone call, letter, or Form 843. This change is intended to improve fairness and consistency and to ensure that eligible taxpayers receive relief regardless of their familiarity with IRS procedures.
What Happens Once First-Time Abatement Is Used?
Once First-Time Abatement has been used, it generally cannot be applied again unless the taxpayer reestablishes a clean compliance history, typically three consecutive years without penalties. Any additional penalties are evaluated under reasonable cause standards.
Reasonable cause relief requires the taxpayer to demonstrate that the failure to comply was due to circumstances beyond their control, such as serious illness, natural disasters, or reliance on incorrect professional advice. This type of relief is based on facts-and-circumstances and is not automatic.
Each penalty is reviewed independently, and documentation is typically required.
If you can’t pay the full amount of your taxes or penalty on time, pay what you can now and apply for a payment plan. When an installment agreement is in place, the failure-to-pay penalty rate is generally reduced, which can significantly limit ongoing penalty accruals.
Tax penalty relief rules can be nuanced, and automatic relief does not eliminate the need for review. Taxpayers should consult with their trusted tax advisor to confirm relief was properly applied and to evaluate options for any future penalties.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.
For more reading:
- What to Do If You Can’t Pay Your Tax Bill: IRS Payment Options Explained
- Options for IRS Payment Plans for Businesses & Individuals