IRS Ends First-Time Abate: What Construction Companies Need to Know

8/6/2026 - By Suzanne Bach

Most construction companies don't get IRS penalties because they're trying to cheat the government. They get IRS penalties because they're busy running construction companies.

There is a big difference.

When you're juggling labor shortages, material delays, retainage, owner payment issues, change orders, and seventy-three other things that lit themselves on fire this week, occasionally something slips through the cracks.

For years, the IRS had a program called First Time Abate (FTA) that could remove certain penalties for taxpayers with a history of doing the right thing.

The catch?

You had to know it existed, that you qualified and you had to know to ask. In other words, it was one of those classic government programs that could save you money...assuming you possessed obscure IRS trivia knowledge.

Fortunately, that is changing.

The IRS recently announced that it is replacing First Time Abate with a new Automatic Exemption from Penalty (AEP) program that will automatically provide relief to eligible taxpayers. No phone call. No request. No sitting on hold wondering whether you've made poor life choices. Qualifying taxpayers will simply receive the relief automatically. 

For many construction companies, that's a pretty big deal.

Why Construction Companies Get IRS Payroll Tax Penalties

Let's say you're a contractor working on a $20 million project. The job is profitable, backlog is healthy, everybody is getting paid except...

The owner is sitting on a $700,000 draw request and another $400,000 is tied up in retainage, while payroll is on Friday. Subcontractors want their money, your surety wants updated financial statements, and the fuel bill just arrived. And now your controller is informing you that federal payroll tax deposits are due.

Welcome to construction.

The frustrating part is that none of these issues necessarily mean the company is struggling. In fact, many successful contractors find themselves temporarily cash-constrained because of timing differences between when money goes out and when money comes in.

Historically, those situations could lead to payroll tax deposit penalties. Then we'd spend time helping clients pursue penalty relief through First Time Abate. Under the new AEP program, many eligible businesses may never see those penalties assessed in the first place. 

The IRS Is Finally Acknowledging Reality

The reality is that good taxpayers occasionally make mistakes.

A controller gets sick, the payroll provider makes an error, an ACH isn’t processed correctly or a tax payment gets scheduled for the wrong day. None of those situations suddenly transform a good business owner into a tax scofflaw.

The IRS appears to recognize that.

Under AEP, taxpayers who have maintained a clean compliance history for the prior three years can automatically qualify for relief from certain failure-to-file, failure-to-pay, and failure-to-deposit penalties. That’s less red tape and more practical thinking, which is something we can all appreciate.

Who Qualifies for IRS Automatic Penalty Relief

This isn't a free pass. The businesses that benefit from AEP are generally the ones that rarely need it. If your company has a history of late filings, missed deposits, or compliance problems, this program isn't designed for you.

Think of it like accident forgiveness on your car insurance. You get the benefit because you usually follow the rules.

The IRS is essentially saying:

"If you've been a good taxpayer for years and you have one bad day, we're not going to make you jump through hoops to prove you're still a good taxpayer."

That's a reasonable position.

Still Got an IRS Penalty Notice? Don’t Ignore

And please, for the love of all things holy, do not start throwing away IRS notices because you read an article about automatic penalty relief. We're currently in a transition period.

The IRS has indicated that some taxpayers who qualify may still receive penalty notices while the agency transitions from FTA to AEP. If that happens, relief may still need to be requested through traditional channels. 

Translation: The IRS is still the IRS. If you receive a notice, send it to your CPA.

The Bigger Lesson

The real takeaway isn't that penalties might disappear automatically, it’s maintaining good compliance habits that just became even more valuable. Companies with strong accounting processes, disciplined payroll procedures, and timely tax filings are positioning themselves to benefit from programs like AEP when the occasional hiccup occurs.

And in construction, there is always an occasional hiccup.

A draw gets delayed, a project gets extended, the customer pays late, someone forgets something, and that’s not unusual. What's important is that those events remain exceptions rather than becoming habits.

Bottom Line

This is one of the most taxpayer-friendly changes the IRS has made in years. For contractors, it means fewer phone calls, fewer abatement requests, fewer administrative headaches, and potentially fewer penalties.

More importantly, it recognizes something we've been telling clients forever: There is a difference between a taxpayer who won't comply and a taxpayer who had a bad day. The IRS has finally built a program that recognizes the difference too. 

If you've received a notice, have questions about tax compliance, or just want to make sure you're doing things the right way, contact our construction team. We'd much rather help you stay ahead of problems than fix them later.

About the Author | Suzanne Bach, CPA

Suzanne is a partner in the tax, accounting, and advisory services, where she leads the the construction team, including specialty groups of State and Local Tax, Mergers & Acquisitions, Trust & Estate, and Outsourced Accounting Services. She began her career in public accounting in 2003, with a focus on tax and consulting.

Her experiences and industry focus include construction, manufacturing, and related sectors, with a specialization in advising high-net-worth business owners on complex tax and financial matters. Suzanne is passionate about helping clients navigate the challenges of growth and compliance while supporting their long-term success. She is an active member of several professional and community organizations, and frequently shares her expertise through speaking engagements and seminars.

 

 

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