How a Consulting Firm Cleared Two Late Payroll Filings Under the IRS Automatic Penalty Program

Sam's List Editorial | 2026-08-07

How a Consulting Firm Cleared Two Late Payroll Filings Under the IRS Automatic Penalty Program This is an illustrative composite based on patterns that recur across small service businesses. It does not describe a specific client, the figures are illustrative rather than actual, and nothing here should be read as a promise of a similar result. IRS automatic penalty relief is the biggest change to small business penalty administration in years, and most owners have not heard of it. On July 8, 2026, the IRS announced Automatic Exemption from Penalty, or AEP. It replaces First Time Abate, the long-standing administrative waiver, and it does something FTA never did: it applies the relief without anyone asking for it. Which sounds like the end of a problem. For a 22-person consulting firm sitting on two quarters of late payroll filings, it was the beginning of a more useful conversation. What Landed in the Mail The firm had grown from nine people to twenty-two in about eighteen months. Payroll moved from monthly to semi-monthly. Nobody revisited the federal deposit schedule. Two notices arrived roughly a month apart. Failure to deposit penalties on two quarters, plus interest, in the low five figures combined. The owner's first instinct was the normal one: this is a bookkeeping error, we will call and explain it, they will waive it. That instinct is right about half the time and it skips the question that actually determines the outcome. Not "was this an honest mistake." The question is whether the firm's prior three years look clean to the IRS. What Changed in 2026, and Why the Timing Was Awkward Under First Time Abate, relief for certain failure-to-file, failure-to-pay, and failure-to-deposit penalties was available to taxpayers with a clean compliance history for the prior three years, but you generally had to request it. AEP applies automatically. Per the IRS announcement, it covers eligible original returns beginning with tax year 2025 returns and 2026 quarterly returns, and it fully replaces First Time Abate for eligible returns with original due dates on or after January 1, 2027. The transition is being phased in through the summer of 2026. The firm sat exactly inside that phase-in, which produced the practical finding: one quarter fell into the automatic program and one did not. That is worth naming because it is the current reality for anyone holding a 2026 notice. Some penalties are clearing themselves. Some still need to be requested the old way. Assuming either one universally is how a deadline gets missed. The Eligibility Test for IRS Automatic...

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