Automatic Exemption from Penalties: A Big Relief for Compliant Taxpayers

What Is Automatic Exemption from Penalties (AEP)?

• Starting summer 2026, the IRS has introduced Automatic Exemption from Penalty (AEP) to replace the First Time Abate relief for eligible taxpayers. (irs.gov)
• AEP applies to original returns beginning with tax year 2025, as well as 2026 quarterly returns, and continues into future tax periods. (irs.gov)

Who Qualifies?

• Taxpayers must have a history of timely filing and paying taxes—three prior tax years (or 12 consecutive quarters for quarterly filers) with no failures to file, pay, or deposit. (irs.gov)
• Information returns and one-off filings like Form 706 (Estate Tax) or Form 709 (Gift Tax) are usually excluded. (irs.gov)

Penalties Covered (and Still Not Covered)

Covered:

• Failure to file penalty
• Failure to pay penalty
• Penalties for failure to make required deposits

Not Covered:

• Interest on unpaid tax still applies
• Other penalties not eligible under AEP remain enforceable

Transition from First Time Abate

• First Time Abate will be phased out during summer 2026. Taxpayers who believe they qualify for First Time Abate may still request it, especially during the transition. (irs.gov)
• Returns with due dates on or after January 1, 2027 will generally be subject to AEP, not First Time Abate. (irs.gov)

Key Takeaways & Strategies

1. Check compliance history: Ensure no late filings or unpaid taxes in last three years (or 12 quarters) if you want AEP.
2. No action needed: If eligible, AEP is applied by the IRS automatically. You’ll receive a notice when it’s granted. (irs.gov)
3. For non-qualifiers: You can still apply for penalty relief using the “reasonable cause” standard. Document events like illness, natural disaster, or other extenuating circumstances.
4. Review notices carefully, to confirm relief was correctly applied.

Example Scenario

Sarah filed all of her federal tax returns on time for 2022–2024 and paid all tax due. In 2025 she was late in remitting a required deposit. Under AEP, if she meets the requirement and her late deposit was the only issue, IRS would automatically waive the penalty for failure to deposit—no application needed. Interest still accrues until payment. If a similar misstep happened in 2026 quarterly returns, qualifying rules via 12 consecutive quarters would apply.

With this in place, compliant taxpayers can breathe easier—less burden, more fairness.