Accounting
First-time penalty abatement will soon be automatic
The IRS’s First-Time Abatement program is a key penalty relief tool for taxpayers with a clean compliance history. For tax professionals, it offers the most direct way to resolve failure-to-file, failure-to-pay and failure-to-deposit penalties for otherwise compliant clients.
At a recent AICPA tax conference, Erin Collins, National Taxpayer Advocate at the IRS, stated that beginning in 2026, the IRS will automatically apply First-Time Abatement to all qualifying taxpayers. Once fully implemented, this shift eases administrative burdens and lets practitioners address more complex matters.
Understanding the authority, eligibility criteria and automation advantages will be essential for firms representing clients before the IRS.
Background and authority
The First Time Abatement program was introduced in 2001 as part of the IRS’s broader effort to promote voluntary compliance. The authority derives from the Internal Revenue Manual, principally IRM 20.1.1.3.6.1, which provides an administrative waiver for taxpayers with a good filing and payment history. It is not based on statute; it is a discretionary administrative practice used by the IRS to incentivize compliant behavior and assist taxpayers who have otherwise maintained good compliance but make an isolated mistake.
The program was designed to decrease the volume of penalty appeals and to acknowledge that compliant taxpayers sometimes miss a filing or payment deadline. The IRS’s goal was to expedite such cases, without requiring taxpayers to assert reasonable cause or go through extended correspondence cycles.
Penalties eligible for First-Time Abatement
First Time Abatement applies to three common noncompliance penalties.
- Failure to file on time;
- Failure to pay on time; and
- Failure to deposit payroll taxes on time.
These penalties often arise from simple oversight, cash flow problems or disruptions in a business’s administrative processes. Since they can quickly add up and, in some cases, outstrip the underlying tax liability, the availability of a simple abatement process is particularly important to both individual and business taxpayers.
“Understanding that First Time Abatement has no dollar cap makes it particularly valuable when payroll tax deposits are missed,” notes Mary Lundstedt, partner at the law firm Hall Lundstedt. “A single quarter’s failure-to-deposit penalty can exceed the underlying tax liability, making this administrative waiver essential for business clients facing potential cash flow issues.”
Eligibility requirements
Although First Time Abatement is simple in concept, eligibility must be met exactly. There are three criteria considered by the IRS:
1. Filing compliance: The taxpayer must have filed the necessary returns for the last three years or have valid extensions on file. The IRS will not allow a First Time Abatement if the taxpayer has unfiled returns.
2. Compliance payment: All taxes due must be paid, or the taxpayer must be in an approved payment arrangement. An installment agreement is acceptable provided the taxpayer is current.
3. Clean penalty history: The taxpayer must not have had any penalties of the same type for the three previous tax years. The IRS interprets this rule very strictly. A penalty abated for reasonable cause is considered a prior penalty. A penalty abated under First Time Abatement is not considered a prior penalty.
When each of these conditions is satisfied, the IRS considers the taxpayer eligible.
Abatement requested
Historically, First Time Abatement was requested by calling the IRS Practitioner Priority Service, filing Form 843, or responding to a penalty notice. Many practitioners routinely ask the IRS to check for First Time Abatement before considering reasonable cause or other penalty relief options.
The IRS would check the compliance history, payment status and eligibility. If the taxpayer was qualified, the IRS granted approval for an abatement during the call or within a few weeks via correspondence. While this process was straightforward, it nevertheless involved both practitioner time and IRS resources. It also generated inconsistent results when IRS staff applied the rules unevenly.
Automatic abatement
IRS officials, including National Taxpayer Advocate Erin Collins, have announced that the agency will automatically grant the First Time Abatement whenever a taxpayer qualifies. The development shows improvements in IRS data systems and a broader trend toward automatic penalty reductions for compliant taxpayers.
When fully implemented, the automated waiver process should grant eligible taxpayers relief without requiring an application. This automation minimizes the need for calls, letters and follow-up inquiries, and reduces disputes over process, timing and eligibility.
Automatic application offers several benefits: it eliminates obstacles for taxpayers unaware of available relief, reduces the volume of calls to already overburdened IRS phone lines, minimizes errors from manual reviews, and ensures equal treatment for similarly situated taxpayers.
“While automation represents a significant advancement in penalty administration, practitioners should verify transcript entries carefully during the transition period,” advises Ashlee Hall, founding partner at Hall Lundstedt. “System limitations in the early stages could result in eligible penalties being overlooked, and proactive account review remains essential to protect client interests.”
Benefits for taxpayers and practitioners
First-time abatement has great value due to its predictability and simple administration compared to reasonable cause arguments. It does not need evidence, detailed narratives or proof of facts. It is entirely based on compliance history and status when requested.
Taxpayer benefits include:
1. Reduced financial burden: These penalties can be substantial. Avoiding these penalties creates cash stability for the taxpayer, particularly when the penalty exceeds the underlying tax.
2. Faster resolution: Clients and firms avoid lengthy correspondence cycles and multi-month delays.
3. Recognition of prior compliance: Taxpayers with a long record of timely compliance receive practical acknowledgement of this behavior.
This is a significant change, as taxpayers will receive relief automatically. In firms, automation enables staff to focus on higher-value advisory work. Rather than spending time on penalty calls, teams will concentrate on planning, representation, and resolving substantive issues.
Issues in practice management
First-time abatement review should be added to tax professionals’ standard penalty intake procedures. Even with automatic approval, firms should continue to review account transcripts to confirm the application and identify any penalties that were not removed as anticipated. Firms should also educate clients on the importance of maintaining a clean compliance history. A single failure-to-file penalty in the lookback period will eliminate eligibility for three years.
First Time Abatement remains one of the IRS’s most effective administrative relief programs. It delivers predictable, rule-driven relief for compliant taxpayers and reduces unnecessary administrative burden for both practitioners and the IRS. As the IRS adopts automated approval, tax professionals will experience fewer penalty disputes and swifter resolutions for eligible clients.
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