First Time Penalty Abatement for Clients: IRM 20.1.1.3.3.2.1 Criteria, the Clean Three Year Test and the Move to Automatic Relief

First Time Abate (FTA) is the IRS administrative waiver that removes a failure to file, failure to pay or failure to deposit penalty when the taxpayer has a clean compliance record for the three years before the penalized period. It does not depend on why the return or payment was late. The client qualifies on history alone, so the first screening step in any penalty notice is to pull the prior three years and check them against IRM 20.1.1.3.3.2.1.

The program is also changing. The IRS has announced Automatic Exemption from Penalty (AEP), which grants the same kind of relief without a request for newer periods. Knowing which tool covers which tax period is now part of the job.

Which penalties can FTA remove?

IRM 20.1.1.3.3.2.1 lists three families:

• Failure to file: IRC 6651(a)(1), 6698(a)(1) and 6699(a)(1).
• Failure to pay: IRC 6651(a)(2) and 6651(a)(3).
• Failure to deposit: IRC 6656.

It does not cover returns with an event-based filing requirement, the Daily Delinquency Penalty, or information reporting that depends on another filing. The IRM names Forms 706, 709, 990, the 1099 series, 8300, 3520 and 3520-A as examples, with an exception for Forms 5471 and 5472 handled in IRM 20.1.9. Late information returns are therefore a poor fit; see W-2 and 1099 filing deadlines, penalties and corrections for the other routes.

What is the clean three year test?

The IRM sets out the criteria, and all must be met:

1. Filing history. The taxpayer filed the same return for each of the three years before the penalized period, unless there was no filing requirement for a year. A year with no requirement is not held against the client.
2. No prior penalties. Those returns were processed and the modules carry no unreversed penalties, except an estimated tax penalty. A notice showing an assessed penalty also disqualifies.
3. No prior manual removals. Those modules show no penalty removed with the manual codes the IRM lists (PRC 018, 020 or 021).
4. Both returns where two apply. For certain filers with primary and secondary returns, both must meet the criteria.

The IRS administrative penalty relief page states the history test in plain terms: the same return type was timely filed for the prior three years (or 12 consecutive quarters), and any earlier penalty was either never assessed or was abated for reasonable cause or IRS error. Business filers have extra conditions. Four or more failure to deposit waiver codes in the three year history disqualify, and a deposit penalty charged for avoiding the electronic payment system also disqualifies. For Forms 1120 and 1120-S, a late return in the look-back period that was not penalized disqualifies too.

What other rules limit FTA?

• One period only. FTA applies to a single tax period for a single return. The IRM notice language says this removal is only available one time, and later penalties are judged on reasonable cause.
• Module-wide. If any module in the look-back period has a qualifying penalty issue, FTA does not apply to any penalty on the module under review.
• Order of relief. FTA is applied before reasonable cause. The IRS tells the taxpayer the penalty was removed for compliance history, not for the written explanation.
• IRS error is separate. FTA is not the tool where the IRS caused the penalty or the client clearly complied. Those cases call for correction.
• Current filing and payment. The IRS tax tip on penalty relief describes the taxpayer as having filed all currently required returns (or an extension) and paid or arranged to pay the tax due. Get the client compliant before you ask.

What does the penalty look like in a worked example?

A client files a 2025 individual return 45 days after the April deadline, which is two months or fraction of a month late. Tax shown is $8,000 and it is paid with the return. The three prior returns were filed on time with no penalties.

Under IRC 6651(a)(1) the failure to file addition is 5 percent of the tax for each month or fraction, up to 25 percent. Under 6651(a)(2) the failure to pay addition is 0.5 percent per month or fraction, up to 25 percent. For any month where both apply, 6651(c)(1) reduces the failure to file addition by the failure to pay addition.

Total penalties of $800 equal 5 percent per month for two months on $8,000. The client has a clean three year history, so FTA removes the full $800. The unpaid tax and any interest remain owed, which the IRS says even under automatic relief.

How do you request FTA?

Call the number on the notice, or send a written statement or Form 843. The IRS page says you do not need to name FTA or attach supporting documents, because the IRS reviews the account. Practical steps:

1. Pull transcripts for the penalized year and the three prior years for every module involved.
2. Confirm filing, payment and deposit history against the criteria above.
3. Confirm no other open returns or unpaid balances.
4. Make the request by phone when the notice allows, and keep a call log with the representative's identification number.
5. Draft the reasonable cause argument in parallel, because FTA applies once and later penalties are judged on reasonable cause.
6. If the IRS denies relief, the penalty appeal route is available online.

The failure to pay penalty keeps growing until the tax is paid in full, so paying first shrinks the amount at stake. The IRS tip also accepts a taxpayer who has arranged to pay.

What is Automatic Exemption from Penalty?

The IRS administrative penalty relief page describes AEP as beginning in summer 2026 for 2025 tax year returns and subsequent, and 2026 quarterly returns and subsequent. It covers Forms 1040, 1065 and 1120, Forms 940, 941, 943, 944 and 945, and Form CT-1. The conditions: the taxpayer files or pays late in the current period and filed and paid on time in the prior three years (or 12 consecutive quarters). AEP covers failure to file, failure to pay and failure to deposit penalties.

The differences from FTA are practical:

• AEP needs no request. The IRS applies it when the original return finishes processing and sends a notice.
• No penalty is assessed, rather than assessed and then removed.
• The failure to pay penalty does not accrue on unpaid tax under AEP, while it may keep accruing under FTA until the tax is paid.

FTA continues for all prior years and periods, and for 2025 tax year and 2026 quarterly returns that AEP does not consider. A client with a 2024 penalty notice still needs the manual FTA request. A client late on a 2025 Form 1040 may get only a letter saying no penalty was assessed.

What should the firm file for each request?

Keep the transcript pulls, the module-by-module checklist, the date and content of the request and the result in the client file. Record which relief applied (FTA, AEP or reasonable cause) because the choice affects the next year's options. Pair this with the calendar controls in federal tax due dates for 2026 and extensions, and use the practitioner priority service guide for the call itself. For penalty exposure that FTA cannot reach, see trust fund recovery penalty and payroll tax controls.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• Internal Revenue Service, IRM 20.1.1, Introduction and Penalty Relief (section 20.1.1.3.3.2.1 First Time Abate): https://www.irs.gov/irm/part20/irm_20-001-001r
• Internal Revenue Service, Administrative penalty relief (First Time Abate and Automatic Exemption from Penalty): https://www.irs.gov/payments/administrative-penalty-relief
• Internal Revenue Service, Here's what taxpayers should know about penalty relief: https://www.irs.gov/newsroom/heres-what-taxpayers-should-know-about-penalty-relief
• Cornell Law School Legal Information Institute, 26 U.S.C. 6651: https://www.law.cornell.edu/uscode/text/26/6651

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error