October 15 has come and gone, and for many households and small businesses in Union City, CA, that means extended returns are finally filed. It can also mean a notice in the mail with a penalty attached for a late filing, a late payment, or a missed payroll deposit. Here’s the good news: IRS penalty abatement is real, it’s often simpler than people expect, and in 2026 the IRS is changing how much of it works.
This guide explains the main relief options, what’s new this year, and how California’s Franchise Tax Board (FTB) handles the same problem. Every rule below comes from IRS.gov and FTB.ca.gov.
What Is IRS Penalty Abatement?
Penalty abatement means the IRS removes or reduces a penalty it charged (or would have charged) on your account. The IRS gives relief in a few main ways:
- Administrative relief, like First Time Abate (FTA) and the new Automatic Exemption from Penalty (AEP), based on your compliance history.
- Reasonable cause relief, based on facts showing you used ordinary care and prudence but still couldn’t comply.
- Formal announcements, where the IRS publishes relief for a specific situation through a policy statement, news release or notice.
One detail matters a lot: according to the IRS, when a penalty is reduced or removed, the interest related to that penalty is reduced or removed automatically.
What’s New in 2026: Automatic Exemption from Penalty (AEP)
For years, First Time Abate was the IRS’s most common administrative waiver. The IRS says FTA is now moving to a new program, the Automatic Exemption from Penalty (AEP), which started in summer 2026.
Under AEP, if you file or pay late in the current year but filed and paid on time for the three prior years (or 12 consecutive quarters for quarterly filers), the IRS won’t assess the penalty at all. It applies when your original return finishes processing, and the IRS sends a letter explaining that relief was applied. You don’t need to call or respond.
AEP covers these return types:
- Forms 1040, 1065 and 1120
- Payroll and employment returns: Forms 940, 941, 943, 944 and 945
- Form CT-1
It starts with 2025 tax-year returns and 2026 quarterly returns, so many returns filed this fall on extension may qualify. The IRS also notes a key difference: under AEP, the failure-to-pay penalty isn’t assessed and doesn’t accrue on unpaid tax. You still owe the tax itself, plus interest and any penalties AEP doesn’t cover.
If you get a notice showing a penalty but believe AEP should have applied, the IRS says to contact them.
First Time Abate Still Matters for Older Periods
FTA hasn’t disappeared. The IRS says it still covers eligible periods that aren’t considered for AEP, which means returns from before the 2025 tax year and before 2026 quarterly periods. Unlike AEP, FTA is not automatic. The penalty is assessed first and then removed after you ask. To request it, you can:
- Call the toll-free number in the top right corner of your notice, or
- Send a written statement or Form 843, Claim for Refund and Request for Abatement.
You don’t need to name FTA in your request or send supporting documents. The IRS reviews your account to see if you qualify.
Which penalties qualify?
Under both FTA and AEP, the IRS lists these as eligible regardless of amount:
- Failure to file: tax returns, partnership returns and S corporation returns
- Failure to pay: tax shown on a return, or tax that should have been shown and wasn’t paid by the date on the notice
- Failure to deposit: deposits not made in the correct amount, on time, or in the required manner
Who qualifies?
You need a clean compliance history. That means you filed the same type of return on time for the prior three years (or 12 consecutive quarters). It also means no penalties were assessed in that time, except an estimated tax penalty, or any penalty that was charged was later removed for reasonable cause or IRS error. Businesses have two more conditions. The IRS can’t have waived a failure-to-deposit penalty four or more times in that period, and the penalty can’t have been charged for avoiding EFTPS.
The IRS excludes event-based or infrequent returns, the Daily Delinquency Penalty, and information reporting that depends on another filing.
Reasonable Cause: When Your Record Isn’t Perfect
If you don’t qualify for administrative relief, the IRS may still remove a penalty for reasonable cause. It decides case by case. Examples the IRS lists include fires, natural disasters or civil disturbances, being unable to get records, the death, serious illness or unavoidable absence of the taxpayer or immediate family, and system issues that delayed an electronic filing or payment.
The IRS is just as clear about what usually doesn’t count: relying on a tax professional, not knowing the rules, mistakes and oversights, and lack of funds on its own. Reasonable cause also doesn’t apply to some penalties, such as the estimated tax penalty.
When you ask, explain what happened and when, how it stopped you from filing or paying, and what you tried to do. Include documentation such as medical or court records, disaster documentation, letters, or receipts. If the IRS can’t approve relief by phone, you can ask in writing on Form 843. Also, if you request reasonable cause relief but qualify for First Time Abate, the IRS says it will apply FTA.
Don’t Forget California: FTB One-Time Penalty Abatement
Owners in Union City, Fremont, Hayward, Newark and San Leandro often face penalties from both the IRS and the state. California has its own program. The FTB’s One-Time Penalty Abatement can cancel a late-filing or late-payment penalty for individuals. It is:
- Once in a lifetime
- Only for individuals under the Personal Income Tax Law, not fiduciaries, estates or trusts
- Available for taxable years beginning on or after January 1, 2022
To qualify, you must have filed every required return and never received this abatement before. You must also have paid all other balances in full, or be current on an approved installment agreement. You can request it by phone or with FTB 2918, One-Time Penalty Abatement – Individual. To request relief for reasonable cause instead, use FTB 2917.
It helps to know what you might be facing. The FTB lists a late-payment penalty of 5% of the unpaid tax plus 0.5% for each month or part of a month it stays unpaid, up to 40 months. For S corporations and partnerships, the late-filing penalty is $18 per shareholder or partner per month, for up to 12 months.
A Practical Checklist for Union City Businesses
- Read the notice closely. Note the tax period, the return type and the exact penalty.
- Check for an AEP letter if the notice is for a 2025 return or a 2026 quarterly return.
- Review your three-year history to see if FTA might apply to older periods.
- Pay the tax, or set up a payment plan. The IRS notes that a payment plan may reduce future penalties.
- Collect your documents before requesting reasonable cause relief.
- Handle the California side separately with the FTB.
- Fix the cause. Most penalties come from missed deadlines, so tighter books and payroll schedules are the best long-term fix.
That last step matters most. Payroll deposit penalties are among the most common for small employers. Accurate, on-time payroll services and current bookkeeping services protect the clean history that makes you eligible for AEP and FTA.
Get Help With IRS and FTB Penalty Notices
Accountico Inc helps individuals and small businesses in Union City and across the Tri-City area review notices, figure out which relief applies, and prepare requests on their behalf. The IRS confirms you can authorize someone to contact it for you. If a penalty notice is sitting on your desk this October, see our accounting and tax services or contact our team to get started.
This article is general information based on IRS and FTB guidance as of October 2026. It is not tax advice for your specific situation.
