IRS Rolls Out Automatic Tax Penalty Relief For Small Businesses

The IRS is introducing an automatic penalty-relief program that could provide financial relief to eligible small businesses that miss certain tax deadlines despite a history of compliance, Forbes reports.

The Automatic Exemption from Penalty program, or AEP, is expected to launch later this summer and replace the agency’s First Time Abate process, according to the outlet. The program will apply beginning with the 2025 tax period and 2026 quarterly returns, as well as future tax periods.

The change comes as many small-business owners operate with limited financial reserves

. A survey found that 39% of small-business owners had less than one month of operating expenses on hand. Another 51.3% said they would tap emergency reserves within 48 hours to make payroll before paying upcoming taxes or covering an unexpected large order.

Such limited reserves can leave businesses vulnerable when natural disasters, illnesses, or other emergencies disrupt operations and make it difficult to meet tax obligations.

Under the IRS’ First Time Abate process, eligible taxpayers generally

had to request penalty relief. AEP will instead automatically provide relief from certain failure-to-file, failure-to-pay, and failure-to-deposit penalties to taxpayers who meet the program’s eligibility requirements.

Taxpayers generally must have filed required returns and paid their taxes on time for the previous three years, or 12 consecutive quarters for quarterly filers. Businesses face an additional requirement: The IRS cannot have waived a failure-to-deposit penalty four or more times during the previous three years or 12 consecutive quarters.

When AEP applies, the IRS will send the taxpayer a letter explaining that an otherwise applicable penalty was not assessed because of the taxpayer’s compliance history. Those who believe they qualified but did not receive relief can contact the IRS.

The program does not eliminate the underlying tax obligation. Businesses must still pay any unpaid taxes, interest, and penalties not covered by AEP.

For small-business owners facing temporary financial disruptions, the new system could make penalty relief more accessible by applying it automatically to eligible taxpayers rather than requiring them to request it.

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