IRS Penalty Relief and Military Service: First-Time Abatement, Reasonable Cause and the New AEP

Penalties are often the most fixable part of an IRS balance. On older balances, failure-to-file and failure-to-pay penalties can add up to half of the original tax. For servicemembers and veterans, there are several roads to getting them removed. Here they are in the order I would check them.

The penalties themselves

IRC 6651(a)(1) imposes a failure-to-file penalty of 5% of the tax for each month or part of a month the return is late, up to 25%. IRC 6651(a)(2) imposes a failure-to-pay penalty of 0.5% per month, also up to 25%. Both apply unless the failure was "due to reasonable cause and not due to willful neglect." That phrase is the opening for most relief.

Road one: was it actually late?

Before asking for forgiveness, check whether you needed it. If you served in a combat zone, qualified hazardous duty area or qualifying contingency operation, IRC 7508 disregards that time plus 180 days. IRS Publication 3 says no penalties or interest will be imposed for failure to file or pay during the extension period. A penalty assessed during that window is an error, not a judgment call. See the combat zone deadline extension.

If you were on duty outside the United States and Puerto Rico on the due date, Treas. Reg. 1.6081-5 gave you an automatic two-month extension to file. See the overseas automatic extension.

Road two: First Time Abate

The IRS describes First Time Abate (FTA) as its most common administrative penalty waiver, for taxpayers with three years of timely compliance history. According to the IRS penalty relief page:

• Eligible penalties include failure to file (IRC 6651(a)(1)), failure to pay (IRC 6651(a)(2) and (a)(3)) and failure to deposit (IRC 6656), regardless of amount.
• You qualify if the same return type was timely filed for the prior three years and either no penalty (other than the estimated tax penalty) was assessed or any penalty was abated for reasonable cause or IRS error.
• You request it by calling the number on your notice or by written statement or Form 843. You do not have to name FTA or provide supporting documents. The IRS checks your account.

FTA is a waiver, not an argument. If you qualify, it is usually the fastest path.

Road three: the new Automatic Exemption from Penalty

The IRS has announced that FTA is transitioning to a new program called Automatic Exemption from Penalty (AEP), starting summer 2026. According to the IRS page:

• If you file or pay late in the current year but timely filed and paid for the three prior years (or 12 consecutive quarters for quarterly filers), you will not be assessed the failure-to-file, failure-to-pay or failure-to-deposit penalty.
• AEP begins with 2025 tax year returns and 2026 quarterly returns.
• Eligible returns include Forms 1040, 1065 and 1120 and employment tax Forms 940, 941, 943, 944, 945 and CT-1.
• It is applied when the original return completes processing, and you get a notice explaining it was applied. You do not need to contact the IRS.

If you get a penalty notice for a 2025 return and believe you should have qualified, the IRS says to contact it.

Check the free relief first. Argue reasonable cause only when the free relief does not fit.

Road four: reasonable cause

When FTA or AEP is not available, the question becomes whether you "exercised ordinary care and prudence and were nevertheless unable to file your return or pay your taxes on time," in the IRS's words. The IRS lists examples that may qualify:

• Fires, natural disasters or civil disturbances.
• Inability to get records.
• Death, serious illness or unavoidable absence of the taxpayer or immediate family.
• System issues that delayed a timely electronic filing or payment.

Military service maps onto these naturally. A short-notice deployment that is not a combat zone, a training rotation with no access to records, a service-connected injury and hospitalization, or a spouse's deployment that left the at-home spouse managing a crisis can all be framed as unavoidable absence, serious illness or inability to get records, if the facts support it.

The IRS also lists what generally does not qualify on its own: reliance on a tax professional, lack of knowledge, mistakes and oversights, and lack of funds (though lack of funds can support relief alongside other facts showing reasonable care).

How to build a reasonable cause request

1. Tie the event to the failure. Show the dates: when the event started, when the deadline passed, when the event ended.
2. Show you acted once it ended. Filing or paying promptly afterward is evidence of ordinary care.
3. Document it. Orders, deployment dates, hospital records, a commander's letter, records showing loss of access to documents.
4. Use Form 843 if the phone does not work. The IRS says if it cannot approve relief over the phone, you can request it in writing on Form 843, and that you can appeal a denial.

A note on estimated tax penalties

Retirees and veterans with self-employment income often get hit with the estimated tax penalty. That one is different. The IRS says reasonable cause does not apply to certain penalties such as the estimated tax penalty, and FTA does not cover it. There are separate statutory exceptions in IRC 6654, so read the notice carefully and do not assume the usual relief applies.

Interest

Interest is harder. It generally follows the underlying tax and penalties. When a penalty is removed, the interest on that penalty comes off with it. IRC 6404(e) separately allows abatement of interest attributable to unreasonable IRS errors or delays in performing ministerial or managerial acts. And for pre-service tax debt, the SCRA can cap interest at 6% during service. See the SCRA 6% cap.

Timing

Request relief before you pay if you can. If you have already paid, a penalty abatement request is a claim for refund, and the refund deadlines in IRC 6511 apply. Combat zone service can extend those deadlines.

The law requires prudence and care, not perfection. If you can show both, ask for the penalties back.