The IRS Automatic Exemption from Penalty (AEP) can automatically waive certain penalties for eligible taxpayers with a good compliance history. However, AEP does not cover international information return penalties, including penalties related to forms such as Form 5471 and Form 5472.
The IRS has introduced a significant change to the way certain taxpayers receive relief from late-filing, late-payment and late-deposit penalties.
Beginning in 2026, the new Automatic Exemption from Penalty (AEP) program is replacing the longstanding First Time Abate process for eligible returns. Unlike First Time Abate, which generally required taxpayers to contact the IRS and request relief, AEP can prevent certain penalties from being assessed automatically when the taxpayer meets the eligibility requirements.
For Americans living abroad, owners of foreign corporations and other taxpayers with international reporting obligations, however, there is an important limitation:
AEP does not apply to information return penalties.
That distinction can be particularly important because international information-reporting penalties associated with forms such as Form 5471 and Form 5472 can be substantial.
Key Summary: IRS Automatic Exemption from Penalty
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AEP can provide automatic penalty relief. Eligible taxpayers with the required compliance history may receive relief from certain failure-to-file, failure-to-pay and failure-to-deposit penalties without submitting a separate request.
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International information return penalties are excluded. Qualifying for AEP on Form 1040, Form 1120 or another eligible return does not automatically eliminate penalties connected with international information returns attached to or associated with that filing.
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International penalties can be substantial. Certain Form 5471 failures can result in penalties starting at $10,000, while certain Form 5472 failures can result in penalties starting at $25,000, with additional penalties possible for continued noncompliance.
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Other penalty relief may still be available. When AEP does not apply, taxpayers may be able to seek reasonable-cause relief depending on the particular penalty and the facts and circumstances that caused the filing failure.
IRS Automatic Exemption from Penalty: Quick Facts
| Quick Fact | Details |
|---|---|
| Program | Automatic Exemption from Penalty (AEP) |
| When it begins | Eligible 2025 tax-year returns and 2026 quarterly returns |
| Penalties AEP may cover | Certain failure-to-file, failure-to-pay and failure-to-deposit penalties |
| Compliance history | Generally the previous 3 years for annual returns or 12 consecutive quarters for quarterly returns |
| Separate request required? | No, relief is applied automatically when the requirements are met |
| International information return penalties covered? | No |
| Form 5471 penalty | Can start at $10,000 for certain filing failures |
| Form 5472 penalty | Can start at $25,000 for certain filing failures |
| Other international forms affected | May include Form 8938, Form 3520 and other international information returns |
| Other relief available? | Reasonable-cause relief may be available depending on the penalty and circumstances |
What is the New Automatic Exemption from Penalty?
Historically, taxpayers with a good compliance history could request relief from certain penalties under the IRS’s First Time Abate (FTA) program.
The new AEP program changes that process.
If an eligible taxpayer has a sufficient history of timely filing and payment compliance, the IRS can automatically prevent certain penalties from being assessed. No separate application or request is required.
AEP may provide relief from certain:
- Failure-to-file penalties
- Failure-to-pay penalties
- Failure-to-deposit penalties
The IRS currently lists eligible return series including Forms 1040, 1065 and 1120, certain employment tax returns including Forms 940 and 941, and several other qualifying returns.
AEP begins with eligible 2025 tax-year returns and 2026 quarterly returns, as well as future periods.
Who Qualifies For AEP?
One of the central requirements is a history of timely compliance.
Generally, the IRS looks at the previous three years for annual returns or 12 consecutive quarters for quarterly returns. The taxpayer generally must have timely filed the same return type and paid the applicable tax during the required compliance period. Additional requirements can apply to businesses.
When AEP applies, the IRS does not first assess the eligible penalty and require the taxpayer to seek abatement. Instead, the penalty is prevented from being assessed during original-return processing, and the IRS sends the taxpayer a notice explaining that relief was granted.
Not Sure If AEP Covers Your Penalty?
Automatic IRS penalty relief has important limitations, particularly for taxpayers with foreign businesses, assets, trusts or investments. Let our international tax team review your situation.
What Happens to First Time Abate?
The IRS is phasing out First-Time Abate as it transitions to AEP.
FTA remains available for certain returns during the transition period. However, for eligible original returns with due dates on or after January 1, 2027, the IRS states that FTA will no longer be available and will be replaced by AEP.
For many taxpayers, this should make routine first-time penalty relief simpler because qualifying taxpayers will no longer need to affirmatively request it.
But international taxpayers need to pay particular attention to what AEP does not cover.
AEP Does Not Cover Information Return Penalties
The IRS specifically states that AEP does not apply to information return penalties. It also identifies information reporting dependent on another filing as ineligible for this administrative relief.
This creates an important distinction for taxpayers with international reporting requirements.
A taxpayer could potentially qualify for AEP with respect to an eligible penalty associated with an underlying Form 1040 or Form 1120 while still facing a separate penalty associated with an international information return.
In other words, qualifying for automatic penalty relief on the income tax return does not mean every international reporting penalty connected with that return disappears.
That can matter when taxpayers are required to file forms involving foreign corporations, foreign assets, foreign trusts or certain cross-border transactions.
Form 5471 Penalties Can Start at $10,000
Form 5471, Information Return of US Persons With Respect to Certain Foreign Corporations, is required of certain US officers, directors and shareholders of foreign corporations.
According to the IRS, a taxpayer may be subject to a $10,000 penalty for each failure to file a complete and correct Form 5471 by the due date.
If the taxpayer does not correct the failure within 90 days after the IRS mails a notice, additional penalties of $10,000 for each 30-day period may apply, subject to a maximum continuation penalty of $50,000 for the failure.
Because these are information-reporting penalties, taxpayers should not assume AEP will eliminate them simply because they otherwise have a strong compliance history.
Form 5472 Penalties Can Start at $25,000
The potential penalties associated with Form 5472 can be even larger.
Form 5472 applies to certain 25% foreign-owned US corporations and foreign corporations engaged in a US trade or business. It also has important applications for certain foreign-owned US disregarded entities.
The IRS states that failure to file a complete and correct Form 5472 by its due date may result in a $25,000 penalty.
If the failure continues for more than 90 days after IRS notification, an additional $25,000 penalty can apply for each 30-day period or fraction of a 30-day period that the failure continues. The IRS states that there is no maximum amount for these continuation penalties.
For foreign owners of US businesses, this makes timely Form 5472 compliance particularly important.
Penalties for Other International Information Returns
Forms 5471 and 5472 are only two examples.
Internationally connected taxpayers may also encounter reporting requirements involving forms such as:
- Form 8938 for certain specified foreign financial assets
- Form 3520 for certain foreign trusts and foreign gifts
- Other international information returns depending on foreign business ownership, investments and cross-border transactions
For example, the IRS states that failure to timely file a complete and correct Form 8938 may result in an initial $10,000 penalty, with additional continuation penalties potentially reaching $50,000 after IRS notification.
Whether a particular form is required depends on the taxpayer’s individual facts and circumstances.
Does this mean there is no penalty relief for international forms?
No.
The fact that AEP does not cover information return penalties does not necessarily mean a taxpayer has no other avenue for relief.
The IRS states that it may remove or reduce certain international information-reporting penalties when the taxpayer acted in good faith and can establish reasonable cause. However, reasonable cause is determined based on the particular penalty and the taxpayer’s facts and circumstances, and the IRS cautions that not every international information-reporting penalty qualifies for reasonable-cause relief.
This is fundamentally different from AEP.
AEP is designed to operate automatically when its requirements are satisfied. Reasonable-cause relief generally requires a taxpayer to establish why the failure occurred and why relief is appropriate.
Filed Form 5471 or Form 5472 Late?
Late or incomplete international information returns can result in substantial penalties. Our team can review your filing history and help you understand your options for correcting the issue and seeking available penalty relief.
How Does AEP Affect Americans Living Abroad?
International taxpayers frequently have filing obligations beyond a standard Form 1040.
For example, an American living overseas might have:
- An ownership interest in a foreign corporation
- Foreign financial accounts or investments
- An interest in a foreign trust
- Certain foreign gifts or inheritances
- A business organized outside the United States
- A US business with foreign ownership
Some of those situations can trigger information-reporting requirements even when the underlying transaction produces little or no additional US income tax.
That makes the distinction between an income-tax penalty and an information-reporting penalty particularly important.
A taxpayer should not see the announcement of automatic IRS penalty relief and conclude that late international filings are now automatically protected.
Example: AEP and Form 5471 Penalty
Consider a US taxpayer who owns a foreign corporation and is required to file Form 5471 with an individual income tax return.
Assume the taxpayer files the Form 1040 late but otherwise meets the IRS requirements for AEP.
Depending on the facts, AEP could prevent an eligible failure-to-file penalty associated with the Form 1040 itself.
However, if the taxpayer also failed to timely file a required Form 5471, the separate Form 5471 information-reporting penalty would not become eligible for AEP merely because relief applied to the underlying Form 1040. The IRS expressly excludes information return penalties from AEP.
That distinction is one of the most important aspects of the new rules for internationally connected taxpayers.
What Should International Taxpayers Do?
The introduction of AEP is generally a positive development for taxpayers who occasionally miss a filing or payment deadline after maintaining a strong compliance history.
But international taxpayers should continue to treat information-reporting deadlines separately.
Before relying on AEP, determine:
- Which return or form was filed late.
- What specific penalty applies to that filing.
- Whether the return and penalty are eligible for AEP.
- Whether a separate international information return was required.
- Whether reasonable-cause or another form of penalty relief may be available if an international information-reporting penalty has already been assessed.
The most important takeaway is that automatic relief for one penalty does not necessarily provide relief from every filing requirement associated with the same tax return.
Received an IRS Penalty Notice?
Automatic relief isn’t the only potential option. Depending on your circumstances, other forms of penalty relief may be available. We can review the notice and help determine your next steps.
IRS Automatic Penalty Relief for International Taxpayers: The Bottom Line
The IRS’s new Automatic Exemption from Penalty should simplify penalty relief for many taxpayers with a history of timely compliance.
For taxpayers with international reporting obligations, however, the change comes with an important limitation: AEP does not cover information return penalties.
With potential penalties starting at $10,000 for certain Form 5471 failures and $25,000 for certain Form 5472 failures, identifying international filing obligations before the deadline remains extremely important.
Taxpayers with foreign corporations, foreign-owned US businesses, foreign trusts, foreign financial assets or other cross-border activity should evaluate their international reporting requirements separately rather than assuming the new automatic penalty-relief program applies.
