Penalty Abatement: What Changed in July 2026
Penalty abatement has just been rewritten, and the headlines describing it as automatic relief are dangerously incomplete for anyone living outside the United States. On 8 July 2026 the IRS announced that First Time Abate is being replaced by a new Automatic Exemption from Penalty. Consequently, millions of taxpayers will receive relief they never thought to request.
That change is genuinely good news, and it is also a trap. The new system suppresses the three ordinary penalties every domestic taxpayer meets. Meanwhile, it leaves untouched almost every penalty that actually threatens a wealthy American in Britain. Therefore, reading the announcement and concluding you are protected is precisely the wrong conclusion.
At TaxYork we handle late filings, catch-up submissions and penalty notices for senior executives, business owners and investors across the UK. Furthermore, the penalties we argue about are rarely the ones the new relief covers. This guide separates what the automatic system fixes from what it will never touch.
The distinction matters in hard cash. A client of ours had roughly $23,650 of ordinary penalties removed by penalty abatement in the same year they faced $60,000 of information return penalties that no automatic process would ever reach. Consequently, understanding the boundary is worth considerably more than understanding the relief itself.
What Penalty Abatement Actually Covers
Penalty abatement under this administrative waiver covers exactly three charges: failure to file, failure to pay and failure to deposit. The IRS confirms that no other penalty type qualifies, and the position is the same under the old and new systems.
Notice what that list excludes. Accuracy-related penalties, daily delinquency penalties and, critically, information return penalties all sit outside the scheme. Therefore, the relief addresses lateness and non-payment rather than the substance of what you reported.
The waiver is also administrative rather than statutory. Consequently, it requires no explanation, no excuse and no supporting evidence, which distinguishes it entirely from reasonable cause relief. You qualify on your compliance record alone, and that record does the arguing for you.
Why Most Eligible Taxpayers Never Claimed It
Under the old system, relief had to be requested. Consequently, the overwhelming majority of eligible taxpayers simply paid penalties they were entitled to have removed, because nobody told them the waiver existed.
The scale of that failure is remarkable. Around 220,000 taxpayers received manual First Time Abate relief in the 2025 fiscal year. Meanwhile, the National Taxpayer Advocate estimated that more than 1.5 million would have qualified, roughly seven times as many.
That gap is the entire reason for the reform. Furthermore, it tells you something useful about the years still open on your own record, because penalty abatement you failed to request in an earlier year may still be available now.
First Time Abate: The Rules That Still Apply
First Time Abate has not disappeared. It continues to operate during the transition, and its eligibility test survives unchanged inside the new automatic system. Therefore, understanding the test remains essential rather than historical.
The Three-Year Clean History Test
The core penalty abatement condition is a clean compliance record for the three tax years preceding the year in question. Specifically, the same return type must have been filed on time in each of those years, with no penalty assessed, or with any penalty later removed for reasonable cause or IRS error.
Estimated tax penalties are treated differently and do not automatically disqualify you. Nevertheless, a single late filing penalty in the look-back period ends the claim entirely. Consequently, we always pull a full account transcript before assuming penalty abatement is available.
Quarterly filers face an equivalent test across twelve consecutive quarters. Additionally, businesses must not have had the deposit penalty waived four or more times in the preceding three years.
Filing and Payment Compliance
Two further penalty abatement conditions apply. You must have filed all currently required returns, or hold a valid extension for them, and you must have paid or arranged to pay any tax due.
That second requirement catches people out. An outstanding balance does not disqualify you provided an instalment arrangement is in place and current. Therefore, agreeing a payment plan before requesting penalty abatement frequently rescues an otherwise failing claim.
Compliance is measured across your whole account rather than the single year in dispute. Consequently, an unfiled information return elsewhere on the file can undermine a claim that looks clean on its face.
How to Request It Under the Old System
Requests could be made by telephone, in writing, or on Form 843. Notably, you never had to name the waiver or supply documents, because the IRS checks the compliance history itself.
Speed favoured the phone route for straightforward cases. Meanwhile, written requests suited files where the account history needed explaining, or where several years were in play at once. In our experience, a short covering analysis of the transcript resolved more cases than a long narrative ever did.
The Automatic Exemption from Penalty
The new regime removes the penalty abatement request step altogether. Rather than assessing a penalty and waiting for you to challenge it, the IRS checks your compliance history while processing the return and declines to assess the penalty at all.
Effective Dates and the Transition
The timing is specific, and it matters for penalty abatement planning. The IRS states that the Automatic Exemption from Penalty applies to original returns with due dates of 1 January 2027 or later.
First Time Abate continues in the meantime. Consequently, eligible 2024 and 2025 returns, along with certain quarterly returns, still run through the older request-based process. Therefore, for the returns most readers are filing right now, penalty abatement remains something you must actively claim.
That overlap creates a window worth using. Additionally, anyone sitting on an unclaimed waiver from an earlier year should act rather than assume the new system will sweep it up retrospectively.
What Changes for You
Three practical consequences follow. First, eligible taxpayers receive a notice explaining that the penalty was not assessed because of three prior years of timely compliance. Secondly, no request, call or form is required. Thirdly, the relief reaches people who would never have known to ask.
The eligibility test itself does not loosen. Consequently, the same three-year clean history, filing compliance and payment compliance conditions apply exactly as before, and penalty abatement remains a once-in-three-years resource rather than an annual entitlement.
Automation also removes a small tactical advantage. Previously, a taxpayer could choose which year to spend the waiver on. Meanwhile, an automatic system applies it to the first eligible year it processes, which may not be the year with the largest penalty.
The Trap for Americans Abroad
Here is the part of the penalty abatement story that general coverage omits entirely. The penalties that genuinely endanger wealthy Americans in Britain are not failure-to-file penalties on a 1040. Instead, they are information return penalties, and none of them qualifies.
Information Return Penalties Are Excluded
The IRS explicitly excludes information return penalties from penalty abatement under the automatic exemption. Consequently, a late Form 5471 for your UK company, a late Form 3520, a late Form 8865 or a late Form 8938 attracts no relief under this route whatsoever.
The amounts dwarf the ordinary penalties. A single late Form 5471 carries a $10,000 penalty per form per year, and an owner of two UK companies three years behind faces $60,000 before any continuation penalties. Therefore, the relief that arrives automatically addresses the smaller half of a typical expat problem.
That asymmetry is the central message of this article. Furthermore, it means the correct response to an information return penalty is a reasonable cause submission rather than a penalty abatement request, and the two require completely different preparation.
FBAR Sits Outside the System Entirely
FBAR penalties fall outside the penalty abatement regime entirely, because they are not administered under the Internal Revenue Code penalty provisions. Consequently, neither First Time Abate nor the Automatic Exemption from Penalty touches them, and no compliance history will suppress them.
The exposure is substantial. We set out the current figures in our guide to FBAR penalties in 2026, and FinCEN's own reporting requirements explain the underlying obligation. Our FBAR and FATCA service handles delinquent filings directly.
Therefore, treat FBAR as a separate workstream from the outset. Additionally, an FBAR problem usually signals unfiled information returns alongside it, which compounds the exposure rather than duplicating it.
Accuracy-Related Penalties Are Excluded Too
The 20 per cent accuracy-related penalty for substantial understatement or negligence also falls outside the waiver. Consequently, a client who filed on time but reported incorrectly receives no help from penalty abatement at all.
That exclusion is logical once you see the design. The waiver forgives lateness by reference to a clean record, whereas accuracy penalties concern the substance of the return. Therefore, defending an accuracy penalty requires reasonable cause and good faith, supported by evidence of the position you took.
Cross-border returns attract these penalties disproportionately. Meanwhile, the underlying errors are usually treaty positions, sourcing questions or currency conversions, which our tax treaty optimisation service addresses before they become disputes.
The Penalties You Are Actually Facing
Before deciding whether penalty abatement is the right route, quantify the exposure precisely. The ordinary charges compound faster than most clients expect, and the expat filing calendar creates a specific illusion that costs real money.
Failure to File and the $525 Minimum
Before requesting penalty abatement, quantify the charge. The failure to file penalty under Section 6651 runs at 5 per cent of unpaid tax for each month or part month the return is late, capped at 25 per cent. Consequently, five months of lateness reaches the maximum, and further delay adds nothing to this particular charge.
A minimum applies to very late returns. Where the return is more than 60 days late, the failure to file penalty is the lesser of the tax due or a fixed minimum, which is $525 for returns due after 31 December 2025, up from $510 for the previous period.
That minimum bites hardest on the clients who assume they owe nothing. Therefore, an American in Britain whose foreign tax credits eliminate the entire US liability still faces a fixed penalty for filing late, which penalty abatement can remove but only once every three years.
Failure to Pay and the June Deadline Illusion
Americans abroad receive an automatic two-month extension to 15 June, and a further extension to 15 October on request. Nevertheless, that extension covers filing rather than payment.
The failure to pay penalty accrues from 15 April regardless. Consequently, a client who files in October under a valid extension has still been accruing 0.5 per cent per month since April, and the extension provided no protection against it.
Interest compounds the effect. Additionally, where both penalties apply in the same month, the failure to file charge reduces to 4.5 per cent so the combined monthly rate stays at 5 per cent. We cover the related exposure on investment income in our guide to estimated taxes and the underpayment penalty.
Interest Is Not Abated
Relief removes penalties, not interest. Consequently, even a fully successful penalty abatement claim leaves the interest on the underlying tax in place, and that interest continues to run until the balance is paid.
One exception exists in principle. Interest attributable to an unreasonable IRS error or delay may be abated separately, though the threshold is high and the process is slow. Therefore, we treat interest as a cost of the delay rather than a target for relief.
The practical response is to pay the tax early and argue about penalties afterwards. Furthermore, paying the balance stops the failure to pay penalty and the interest simultaneously, which frequently saves more than the abatement claim itself recovers.
Reasonable Cause: The Route That Covers What Automation Does Not
Where penalty abatement stops, reasonable cause begins. This is the relief that reaches information return penalties, accuracy penalties and the years where your compliance history is not clean.
When Reasonable Cause Beats Penalty Abatement
Unlike penalty abatement, reasonable cause requires you to show that you exercised ordinary business care and prudence yet still could not comply. Consequently, it demands evidence, chronology and explanation, unlike the administrative waiver which demands only a clean record.
The two also interact strategically. Because penalty abatement is available only once in three years, spending it on a small failure-to-file charge can leave nothing for a larger problem later. Therefore, we frequently argue reasonable cause on the smaller penalty deliberately, preserving the waiver for a year with real exposure.
Preparation determines the outcome. We set out our approach in our guides to the reasonable cause alternative to Streamlined and to reasonable cause narratives in complex high-value cases.
Streamlined for Unfiled Years
Where returns are missing altogether rather than merely late, a different route applies. The IRS Streamlined Filing Compliance Procedures allow non-wilful taxpayers to file three years of returns and six years of FBARs, with the offshore penalty waived for those meeting the foreign residency test.
Streamlined is not a penalty abatement request and should never be described as one. Instead, it is a disclosure programme with its own eligibility conditions, its own certification and its own risks if the non-wilfulness statement is inaccurate. Our IRS Streamlined Filing service prepares these submissions end to end.
Sequencing the two matters. Consequently, we normally resolve the disclosure position first and address ordinary penalties afterwards, since a Streamlined submission changes the compliance record the waiver depends upon. Further background sits in our guide to late filing penalties.
The British Parallel: HMRC Penalties and Reasonable Excuse
Americans in Britain file twice, so they can be penalised twice. Consequently, a complete penalty abatement strategy has to address HMRC alongside the IRS, and the two systems reward completely different arguments.
How HMRC Charges Late Filers
A missed Self Assessment deadline triggers an immediate £100 fixed penalty, and HMRC's published rules impose further charges once the return is more than six months late. The fixed penalty applies even where no tax is owed, which mirrors the American minimum charge.
Late payment is treated separately from late filing, exactly as it is in the United States. Therefore, an American who extends the US return to October and pays HMRC in January can accumulate charges on both sides of the Atlantic in the same year.
HMRC also publishes a penalty estimator, which is worth running before you assume the exposure is trivial. Additionally, appeals normally must be lodged within 30 days of the penalty notice, a far shorter window than anything in the American penalty abatement process.
Reasonable Excuse Is Not Reasonable Cause
The British equivalent of reasonable cause is reasonable excuse, and the standards genuinely differ. HMRC's guidance accepts serious illness or a bereavement shortly before the deadline, while expressly rejecting several arguments Americans routinely rely on.
One rejection matters enormously here. HMRC states plainly that relying on someone else to send your return is not a reasonable excuse. Meanwhile, reliance on professional advice can support an American reasonable cause claim, particularly on technical information returns.
Consequently, the same facts can win in one country and lose in the other. Therefore, we never recycle a US reasonable cause narrative into a UK appeal, and a penalty abatement argument that succeeded with the IRS should never be assumed to travel.
Britain Has No First-Time Waiver
There is no HMRC equivalent of the automatic exemption. Consequently, a clean ten-year compliance record does not, by itself, remove a British penalty, and every appeal turns on the excuse rather than the history.
That asymmetry shapes the sequencing. Since the American waiver is granted on record alone, we claim it quickly and spend the analytical effort on the British appeal instead. Furthermore, the 30-day appeal window means the UK side is usually the more urgent of the two.
Case Study: A London Executive Two Years Behind
Consider a client we shall call the London executive, a US citizen resident in Britain who extended their 2024 return to 15 October 2025 but did not file until 20 February 2026. The return showed US tax of $86,000 after foreign tax credits, none of which had been paid.
The ordinary penalties eligible for penalty abatement accumulated quickly. Failure to file ran at 4.5 per cent per month for five months, reaching 22.5 per cent of the balance, or roughly $19,350. Meanwhile, failure to pay had been running at 0.5 per cent per month since 15 April 2025, adding about $4,300 across ten months.
The compliance record was clean. The executive had filed on time for 2021, 2022 and 2023 with no penalties assessed, so the three-year test was satisfied. Consequently, a single penalty abatement request removed the full $23,650, along with the interest attributable to those penalties.
Interest on the tax itself survived. Approximately $5,000 remained payable, because relief never reaches interest on the underlying liability. Therefore, we advised paying the $86,000 immediately rather than waiting for the abatement decision.
Then the real problem surfaced. The executive owned two UK trading companies and had filed no Form 5471 for either, across three years. At $10,000 per form per year, the exposure reached $60,000 before any continuation penalties, and none of it qualified for penalty abatement under any version of the waiver.
That element required an entirely different submission. We prepared a reasonable cause narrative documenting the professional advice previously received, the client's reliance on it and the steps taken once the omission emerged. Consequently, the information return exposure was argued on evidence rather than on compliance history.
The lesson generalises neatly. Automatic relief handled the visible, familiar penalties without any effort at all. Meanwhile, the exposure that could have cost three times as much sat entirely outside it, and only a deliberate submission addressed it.
How TaxYork Can Help
We begin every penalty abatement engagement with the account transcripts rather than the notice. Consequently, we can see the three-year history, the open years and the unfiled returns before deciding whether penalty abatement or reasonable cause gives the better result.
The work then splits along the boundary this article describes. Specifically, we claim the administrative waiver where it applies, prepare reasonable cause submissions for information return and accuracy penalties, address FBAR separately, and sequence any Streamlined disclosure so that it does not undermine the rest.
For clients still filing 2024 and 2025 returns, the request-based system remains live and worth using now. Furthermore, we review earlier years for waivers never claimed, since a large share of eligible taxpayers historically never asked. Explore our full range of US personal tax services or our US and UK tax returns preparation work.
Conclusion
Penalty abatement is becoming automatic, and that is a real improvement for the roughly 1.3 million taxpayers a year who qualified but never asked. From 1 January 2027, original returns are processed with the compliance check built in, and eligible penalties are simply never assessed.
Nevertheless, the boundary has not moved. The waiver covers failure to file, failure to pay and failure to deposit, and nothing else. Consequently, information return penalties, accuracy-related penalties and FBAR penalties remain exactly where they were, which for wealthy Americans in Britain is where the money actually sits.
Three actions follow. Claim the waiver on 2024 and 2025 returns now, because the request-based system still applies to them. Preserve it deliberately rather than spending it on a trivial charge. Above all, treat your information returns as a separate problem requiring reasonable cause, because no automatic process will ever rescue them.
Contact Us
If you have received an IRS penalty notice, or you are filing late and expect one, we can quantify the exposure and identify which relief applies to each element. Speak to our team on 020 3488 8606 or email hello@taxyork.com. Alternatively, book a consultation and we will review your penalty abatement position across every open year.
Disclaimer
This article provides general information about IRS penalty relief and does not constitute tax advice for any particular person. Procedures, penalty amounts and effective dates change, and the relief available depends on your individual compliance history and circumstances. You should obtain professional advice before acting. TaxYork accepts no liability for any action taken in reliance on this article.
Written by the TaxYork Expert Team — US-UK tax specialists.