IRS Automatic Penalty Relief Program Could Reduce Payroll Tax Deposit Risk

A missed federal payroll tax deposit can trigger hefty penalties — they just went up on July 1.

But a new IRS program could provide automatic penalty relief for eligible employers with a strong compliance history.

The IRS’s Automatic Exemption from Penalty (AEP) program covers failure-to-deposit penalties, which are a key payroll concern when employers miss federal payroll tax deposit deadlines. The program also covers certain failure-to-file and failure-to-pay penalties.

AEP does not change payroll tax deposit schedules, extend deadlines or create a grace period for late deposits. Employers must continue following their assigned deposit schedules and maintaining accurate payroll tax processes. A history of timely deposits and filings will
be critical to eligibility.

How AEP Works

AEP automatically determines whether eligible taxpayers qualify for automatic penalty relief rather than requiring a separate First Time Abate request.

Eligible taxpayers generally must have a history of timely filing returns and paying tax due during the applicable lookback period, along with meeting other IRS requirements.

For business taxpayers, additional rules apply to failure-to-deposit penalties, including exclusions for certain deposit-related violations.

The IRS has identified Forms 940, 941, 943, 944 and 945 as eligible for consideration under AEP. The program is expected to begin this summer, with a full transition away from First Time Abate for eligible returns with original due dates on or after Jan. 1, 2027.

What It Means for Payroll

• Continue following existing federal payroll tax deposit schedules
• Review federal payroll tax deposit and filing history to understand whether the organization meets the compliance requirements for automatic relief
• Maintain documentation supporting payroll tax calculations, deposits and filings
• Maintain accurate records to help support any penalty review or follow-up
• Remember that AEP only provides relief from eligible penalties. Employers are still responsible for paying the underlying tax and any applicable interest, and
• Monitor IRS guidance and notices as the AEP program is implemented.

The bottom line: AEP may reduce penalty exposure when an otherwise compliant employer makes an eligible mistake, but strong payroll tax controls remain the best protection against penalties.

More info: Automatic Exemption from Penalty (AEP)