First-time penalty abatement: who qualifies, what it excludes, how to ask, and the 2027 switch to automatic relief

What first-time abatement is

First-time abatement is not in the Internal Revenue Code. It is an administrative waiver in the Internal Revenue Manual (IRM 20.1.1.3.3.2.1) under which the IRS removes certain penalties for a taxpayer with a clean compliance history, without asking why the return or payment was late. The policy is that one slip after years of compliance should not cost a penalty. If you qualify, the IRS applies FTA before it even considers reasonable cause, and you do not have to use the words “first-time abatement” when you ask.

The relief matters most for pass-through entities. A partnership or S corporation that files a month late owes $260 per owner for every month or part of a month the return is late for returns due in 2027 ($255 for returns due in 2026), for up to 12 months. FTA removes the whole penalty. The late-filing penalty guide runs the numbers.

Which penalties FTA covers, and which it does not

The exclusions catch people out. A business that files its 1099-NECs late cannot use FTA; its only route is a reasonable-cause statement under Reg. §301.6724-1. A partnership whose return was on time but incomplete (notice CP162B) is in the same position. And a partnership that is both late and incomplete can use FTA for the late-filing part only.

Who qualifies: the three-year clean history

You qualify when, for the same type of return, you filed on time (or on a valid extension) for the three tax years before the one with the penalty, and no penalty was assessed for those years, apart from the estimated-tax penalty, which the IRS ignores. For employment returns the look-back is 12 quarters. A penalty that was assessed in the look-back period and later removed for reasonable cause or because of an IRS error does not count against you.

Two details trip up otherwise clean taxpayers. A return that was filed late in the look-back period but was never penalized, say a Form 1065 filed late when there was no notice, still breaks the clean history. And the test is per return type: a clean 1120-S record does not help with a Form 941 penalty.

Older IRM guidance adds a current-compliance step: all required returns must be filed or extended, and any tax due must be paid or on a payment arrangement. Fix those first, then ask.

What happens to unpaid tax

FTA removes the penalty, not the tax or the interest. If the failure-to-pay penalty is abated while a balance remains, the penalty keeps accruing on the unpaid amount from the abatement date, and the IRS can remove the rest once the tax is paid. Interest accrues on penalties until they are paid; the underpayment rate is 7% for the fourth quarter of 2026, compounded daily.

A worked example

A four-partner LLC filed its 2022, 2023 and 2024 Forms 1065 on time with no penalties. Its 2025 return, due March 16, 2026, is filed on May 20, 2026 with no extension: three months or parts of a month late, so the CP162A charges 3 × 4 × $255 = $3,060. The partnership qualifies for FTA: same return type, three clean prior years, and the return is now filed. A call to the number on the notice, or a short letter stating the clean history, should remove the full $3,060. The K-1s were late too, but the §6722 statement penalty is a separate matter that FTA does not cover, so the partnership also writes down why the statements were late in case a Notice 972CG follows.

Now suppose the same partnership files its 2026 return, due March 15, 2027, late as well. FTA is gone, because the look-back now includes a 2025 return that was filed late and penalized, and an abatement under FTA is not an abatement for reasonable cause or IRS error. The automatic exemption for returns due in 2027 needs the same three clean years, so it does not help either. Reasonable cause becomes the only route, which is why the first FTA should be treated as the one free pass it is.

How to ask for first-time abatement

There are three ways, and none needs supporting documents.

1. Phone. Call the number at the top right of the notice. For business accounts the IRS business line is 800-829-4933, 7 a.m. to 7 p.m. local time. Many FTA requests are resolved on the call.
2. Written statement. If the call does not resolve it, send a short letter to the address on the notice asking for abatement of the penalty, giving the tax form, period and notice number, and stating that you have a clean three-year history. For a CP162A on a partnership or S corporation return, mail the request to the IRS office where the return was filed.
3. Form 843. Form 843, Claim for Refund and Request for Abatement, works for a penalty already paid as well as one still owed. Mail it to the return address on the notice, or, with no notice, to the service centre where the current-year return for that tax would be filed. A refund claim must be made within three years of filing or two years of payment (§6511).

If the IRS denies FTA because its records show a late or penalized year you believe is wrong, ask for the account transcript and correct the record before you argue reasonable cause.

The 2027 switch: Automatic Exemption from Penalty

On July 8, 2026 the IRS announced (IR-2026-83) that it is replacing FTA with an Automatic Exemption from Penalty (AEP). For eligible returns with original due dates on or after January 1, 2027, failure-to-file, failure-to-pay and failure-to-deposit penalties will not be assessed at processing for taxpayers with three prior years (12 quarters for employment returns) of timely filing and paying. No request is needed.

The announcement lists the return series the exemption covers: Forms 1040, 1065 and 1120; Forms 940, 941, 943, 944 and 945; and Form CT-1. Form 1120-S is not named. Until the IRS says otherwise, treat an S corporation late-filing penalty as an FTA request rather than something that disappears on its own, and treat 2025 and 2026 partnership and S corporation returns as FTA-eligible in the usual way.

In practice this means a penalty-relief process should branch on the return’s original due date. A Form 1065 for calendar year 2026, due March 15, 2027, falls under AEP; the 2025 return, due March 16, 2026, falls under FTA. FundTaxes’ penalty relief module drafts the right request for the date; start a free trial.

If FTA does not fit: reasonable cause

Reasonable cause is the statutory route and the only one for penalties FTA does not cover. Under IRM 20.1.1.3.2 the IRS grants it when you exercised ordinary business care and prudence but still could not comply. It looks at what happened and when, what prevented compliance, how the facts caused the failure, how you handled your other affairs during the same period, and what you did to comply once the circumstances changed. Compliance has to follow within a reasonable time after the obstacle ends.

Recognized categories include death, serious illness or unavoidable absence; fire, casualty or natural disaster; inability to obtain records; erroneous advice or reliance; and system issues that delayed an electronic filing or payment. Reliance on a tax professional, lack of knowledge, lack of funds, forgetfulness and simple mistakes are generally not enough on their own. Document with dates: hospital or court records, a doctor’s letter, disaster declarations.

Information returns have their own test in Reg. §301.6724-1: either significant mitigating factors (never previously required to file that form, or an established compliance history) or an event beyond your control (records lost to a supervening event, erroneous written IRS advice, an agent’s failure, a payee giving you wrong or no information), plus proof that you acted in a responsible manner before and after. The request must be in writing, signed by the person required to file, with a penalties-of-perjury declaration. A proposed information-return penalty arrives on Notice 972CG, and you have 45 days to respond.

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