October 15 Is Your Extension Deadline. Here's What the IRS's New Automatic Penalty Relief Fixes — and What It Doesn't

If you extended your 2025 federal return — a common move for active traders waiting on corrected 1099-Bs (the brokerage form that reports your sales) or late K-1s (the form a partnership uses to report your share of its income) — your filing deadline is Thursday, October 15, 2026.

This year there's a new wrinkle. In July, the IRS announced an Automatic Exemption from Penalty (AEP) to replace its long-running First Time Abate program. The headlines made it sound like penalties now simply vanish for taxpayers with a good history. The reality is narrower, and the parts AEP doesn't cover are where the money is.

What Your Extension Did (and Didn't) Do

Filing Form 4868, the automatic extension request, by April 15, 2026 gave you more time to file. It did not give you more time to pay. The IRS is explicit on this point: any 2025 tax you owed was still due April 15, 2026.

That leaves you on two separate tracks:

• Filing on time. File by October 15 and your return is on time. No failure-to-file penalty applies.
• Paying on time. Any balance you didn't pay by April 15 has been building a failure-to-pay penalty and interest ever since, extension or not.

Failure-to-File vs. Failure-to-Pay Penalties: The Numbers

Failure-to-file (FTF): 5% of the unpaid tax for each month or part of a month a return is late, up to 25%. For a 2025 Form 1040 filed more than 60 days late, there's also a minimum penalty: $525 or 100% of the unpaid tax, whichever is less, according to the IRS penalty page. When both penalties apply in the same month, the FTF charge is reduced by the FTP amount.

Failure-to-pay (FTP): 0.5% of the unpaid tax for each month or part of a month, up to 25%. The rate drops to 0.25% a month during an approved payment plan if you filed on time, and rises to 1% a month if the tax is still unpaid 10 days after the IRS sends a notice of intent to levy (its formal warning before seizing assets).

The contrast matters: missing October 15 costs roughly nine to ten times more per month than paying late. If you can't pay in full, the IRS's own guidance points toward filing on time anyway.

If you trade through a partnership or S corporation

Those entity returns carry their own late-filing penalty: $255 per partner or shareholder, per month, for up to 12 months, for returns due after December 31, 2025.

Interest Is a Separate Charge

On top of any penalties, the IRS charges interest on unpaid tax, compounded daily. For individuals, the underpayment rate is the federal short-term rate (a benchmark short-term interest rate published by the government) plus three percentage points. The 2026 quarterly rates:

• Q2 (April–June): 6%
• Q3 (July–September): 7%
• Q4 (October–December): 7%

So a balance unpaid since April 15 has accrued interest at an annualized 6%, then 7%. Interest also accrues on penalties — but if a penalty is removed, the interest tied to it goes too.

What the New Automatic Exemption Changes

The IRS announced AEP on July 8, 2026 (news release IR-2026-83). Three core changes:

• No request needed. Under First Time Abate, you generally had to ask, by phone or with Form 843. Under AEP, eligible penalties are handled automatically when the IRS processes an original return.
• Penalties aren't assessed in the first place. Rather than being charged and then removed, covered penalties are never assessed, and the IRS sends a notice explaining why.
• The FTP penalty stops running. According to the IRS's comparison, the failure-to-pay penalty could keep accruing under First Time Abate until the tax was paid; under AEP it "does not accrue and is not assessed on unpaid tax" for the eligible period.

Who qualifies: generally, taxpayers who filed the same type of return on time for the prior three years (12 consecutive quarters for quarterly returns) and had no penalties in that period. Two exceptions: an estimated-tax penalty doesn't disqualify you, and a penalty later removed for reasonable cause (a legitimate excuse such as serious illness or a disaster) or IRS error doesn't count against you.

Which penalties: failure-to-file, failure-to-pay, and failure-to-deposit (the penalty for late employment-tax deposits), on returns including Forms 1040, 1065, 1120, and several employment-tax forms.

The scale is meaningful. The National Taxpayer Advocate noted that about 220,000 taxpayers received First Time Abate through the manual process in fiscal 2025, and estimated that more than 1.5 million would have qualified under an automatic approach.

What AEP Does Not Fix

This is the part to read twice:

• Interest on the tax itself. The IRS states that taxpayers must still pay any tax and interest due. AEP is penalty relief only.
• Accuracy-related penalties. If a cost-basis error, a missed wash-sale adjustment (the rule that disallows a loss when you buy back the same or a substantially identical security around the time of the sale), or underreported gain triggers an accuracy-related penalty, AEP doesn't apply.
• Estimated-tax penalties. Underpaying quarterly estimates — common for traders after a big gain year — isn't covered.
• Information-return penalties, daily delinquency penalties, and certain infrequent returns, such as estate and gift tax returns (Forms 706 and 709).

Timing: Will an October Filer Get AEP or First Time Abate?

The IRS says AEP applies to eligible original returns beginning with tax year 2025, and that First Time Abate still applies, on request, to 2025 returns processed before AEP took effect. First Time Abate ends entirely for original returns due on or after January 1, 2027.

The IRS described AEP as beginning in summer 2026 but hasn't published a precise go-live date, so it's reasonable not to assume an October 15 filer will automatically receive it. If a penalty notice arrives without an AEP notice, the Taxpayer Advocate's guidance is to call the number on the notice and ask about AEP, First Time Abate, or reasonable-cause relief.

One open issue practitioners are watching: the Taxpayer Advocate has raised concerns that AEP may be applied before reasonable cause is considered. That could use up a taxpayer's clean history even when reasonable cause would have applied. As of this writing, the IRS has not issued guidance letting taxpayers swap AEP for reasonable cause.

Check for a Disaster Postponement

The IRS sometimes pushes deadlines back for federally declared disaster areas. For example, taxpayers in certain Louisiana parishes affected by Tropical Storm Arthur have until November 2, 2026 to file extended 2025 returns, though the IRS notes that payments originally due April 15, 2026 are not eligible for that relief. Several other states and territories have postponements as well; the IRS's "Tax relief in disaster situations" page lists each one by location.

The Takeaway

The extension and AEP solve different problems:

• Filing by October 15 keeps the larger failure-to-file penalty from ever starting.
• AEP may spare taxpayers with three clean years from failure-to-file, failure-to-pay, and failure-to-deposit penalties, automatically, once it's live for their return.
• Neither stops interest on unpaid tax, and neither covers accuracy-related or estimated-tax penalties.

Individual situations vary, especially with partnership interests, carryovers, and wash-sale adjustments, so a qualified tax professional is the right resource for applying these rules to a specific return.

This article is educational commentary on public tax rules and IRS announcements, not personalized tax, legal, or investment advice.