Key insights
- The IRS is replacing First Time Abate with Automatic Exemption from Penalty (AEP), removing the need for eligible taxpayers to request relief.
- AEP generally doesn’t apply to information return penalties, which may include penalties tied to Forms 5471 and 5472.
- Some taxpayers previously found relief when Forms 5471 or 5472 were attached to a late-filed business return that qualified for First Time Abate.
- It’s still unclear whether IRS procedures will offer that same path, and how individual Form 1040 filers will fare, once AEP fully replaces First Time Abate.
Check your filing exposure before penalties add up.
The IRS recently announced it is phasing out First Time Abate (FTA) and replacing it with Automatic Exemption from Penalty (AEP), a new process that can apply certain automatic penalty relief for eligible taxpayers.
The change may simplify relief for some taxpayers, but international information return penalties are a different story. Reviewing your filing history now can help you understand where risk exists and what options may still be available before IRS notices arrive.
How IRS penalty relief is changing
First Time Abate is shifting from something taxpayers generally had to request after a penalty was assessed to a more automatic IRS process for certain penalties.
Under the new AEP process, the IRS may prevent some failure-to-file, failure-to-pay, and failure-to-deposit penalties during original return processing when a taxpayer qualifies. The goal is to give eligible taxpayers relief without requiring a separate request. That change may help taxpayers who have a strong compliance history but may not have known FTA was available.
Why international tax penalties need attention now
AEP doesn’t apply to every penalty. The IRS has said information return penalties generally aren’t eligible, which matters for Forms 5471 and 5472.
If you have foreign corporations, foreign-owned U.S. entities, or foreign partnerships, late or missed international tax forms can get expensive fast. Form 5471 penalties start at $10,000 per form and Form 5472 penalties start at $25,000 per form.
FTA generally didn’t apply directly to Forms 5471 and 5472 either. However, some taxpayers had a limited relief path when those forms were attached to a late-filed Form 1120 or Form 1065 and the related business return qualified for FTA.
Transition dates
AEP applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns.
During the summer 2026 transition, FTA remains available on request for those periods, and AEP fully replaces FTA for returns with original due dates on or after January 1, 2027.
That is the key uncertainty now. AEP stops certain penalties during processing instead of removing them after assessment. Until the IRS updates its procedures or provides more guidance, taxpayers should not assume Form 5471 or Form 5472 penalties will receive the same indirect relief they may have received under FTA.
International penalty relief for individual tax filers
The transition also highlights a separate issue involving Forms 5471 filed with Form 1040. Current IRS procedures discussing relief for Form 5471 penalties focus on late-filed Forms 1120 and 1065. They do not expressly refer to Form 1040 filings.
Yet many individuals file Form 5471 as part of their personal income tax return, and relief has been granted in practice using reasoning similar to that applied to business returns.
Some practitioners view the omission of Form 1040 from the relevant Internal Revenue Manual provision as an oversight rather than a deliberate policy decision. Others see the transition to AEP as a natural opportunity for the IRS to clarify its position.
Whether updated guidance expressly addresses individual filers remains an open question. Until then, taxpayers filing Form 5471 with Form 1040 should avoid assuming historical practices will continue unchanged.
What penalty relief options may still apply to Forms 5471 and 5472
As the IRS transitions from FTA to AEP, taxpayers with Forms 5471 and 5472 may still have several potential avenues for relief, depending on their facts and circumstances:
- Relief tied to a qualifying Form 1120 or Form 1065, if the IRS preserves or updates existing procedures that currently reference FTA
- Reasonable cause relief, which remains available when taxpayers can demonstrate they exercised ordinary business care and prudence but were unable to comply
- Correction of IRS errors, such as penalties assessed despite a valid extension or other processing issue
- Form-specific relief provisions, including certain Form 5472 penalty relief considerations discussed in recent IRS guidance
- Administrative appeals and other procedural remedies, when a taxpayer disagrees with a penalty assessment or relief determination
Taxpayers can find additional background in CLA’s article about Form 5472 filing requirements and penalty exposure.
What remains unclear about AEP
A few practical questions remain open as the IRS updates its procedures:
Another development to watch
A separate late-June 2026 IRS change is also worth noting. The IRS removed its Delinquent FBAR Submission Procedures page, which had offered penalty relief when taxpayers had properly reported and paid tax on foreign-account income and had not already been contacted by the IRS.
The page now returns a 404 error, but relief may still be available. On July 16, an IRS spokesperson said late FBAR filers may continue to rely on the reasonable cause language on the FinCEN website. That standard is less clear-cut than the old IRS page, so taxpayers may need stronger documentation to support relief.
Will IRS guidance preserve relief tied to business returns?
IRS procedures currently refer to First Time Abate. If the IRS wants similar relief to continue under AEP, those procedures may need to be updated.
Until that happens, taxpayers could face uncertainty when a Form 5471 or Form 5472 penalty is tied to a late-filed Form 1120 or 1065.
How will individual filers be treated?
Forms 5471 are often filed with individual income tax returns. Existing IRS procedures focus on Forms 1120 and 1065, which means the treatment of Forms 5471 attached to Form 1040 may need additional clarification.
Individuals shouldn’t assume past practice will continue without change.
What happens if the IRS applies AEP automatically?
Because AEP can apply during processing, taxpayers may have less control over the order in which relief options are considered. That may matter in cases where a taxpayer wants to preserve a relief option for another year or pursue reasonable cause based on the facts.
If you have foreign reporting obligations, now is a good time to review exposure, gather documentation, and evaluate relief options before penalties grow.
How to prepare for IRS penalty relief changes
If you have international filing obligations, consider taking these steps before penalties are assessed or notices arrive.
Review your filing exposure
Identify whether you have, or may have had, filing obligations for:
- Form 5471
- Form 5472
- Form 8865
- Form 8938
- FBAR
- Other international information returns
Pay close attention to ownership changes, cross-border transactions, related-party activity, and foreign accounts.
Evaluate available relief options
If filings were missed or filed late, review whether relief may be available through:
- First Time Abate during the remaining transition period
- AEP, if the penalty and return type qualify
- Reasonable cause
- Correction of IRS error
- Other relief paths based on the form, facts, and timing
Document the facts early
Penalty relief often depends on facts. Helpful documentation may include:
- When you became aware of the filing issue
- What information was available at the time
- What advice you received
- What steps you took to correct the issue
- Why the filing was missed or delayed
- How you changed processes to reduce repeat issues
Monitor IRS notices and transcripts
During the transition, some taxpayers may still receive penalty notices even if they believe relief should apply. Review notices carefully and respond within the stated deadlines.
How CLA can help with IRS penalty relief
International information return penalties can be steep, and the move from First Time Abate to AEP adds another layer to penalty-relief planning.
CLA can help you review your international filing exposure, evaluate available penalty-relief options, and prepare documentation to support reasonable cause when it applies. We can also help with ongoing compliance for Forms 5471, 5472, and other international information returns.
Contact us
Check your international tax filing exposure before penalties add up. Complete the form below to connect with CLA.