Compliance
Automatic Exemption from Penalties (AEP): New Relief for Timely Taxpayers
Starting summer 2026, the IRS will roll out Automatic Exemption from Penalty (AEP), easing penalties for those with clean 3-year compliance histories who file or pay late.
By NomadicTax Research Team • 5-8 min read • July 21, 2026
## What Is AEP and Who Qualifies
The IRS is replacing its First Time Abate (FTA) program with a new system called **Automatic Exemption from Penalty (AEP)**. Announced recently, AEP takes effect in Summer 2026 for returns filed and taxes paid late, provided you meet certain compliance history requirements. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
### Eligibility Criteria
You qualify for AEP if:
- You’ve **timely filed and paid tax returns for the prior **three** consecutive years** (or 12 consecutive quarters for those filing quarterly). ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- You're filing one of the following forms: 1040, 1065, 1120, 940, 941, 943, 944, 945, or CT-1. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- All prior returns were filed and payments made on time. No major penalties (other than possibly estimated-tax penalties) during that period.
### What Relief AEP Offers
- **No penalty assessed**: For eligible returns paid or filed late, the IRS won’t assess penalties for failure to file (6651), failure to pay (6651), or failure to deposit (6666 series), if you meet the eligibility criteria. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- **Automatic application**: You do *not* have to request the relief. Once your return is processed and your history checks out, the IRS will apply AEP automatically and send notice. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- **Watch interest**: The IRS notes that while penalties may be waived, interest on any unpaid tax or late payment still accrues.
## Examples
- **Scenario A**: Maria filed and paid her 2022, 2023, and 2024 returns on time. She files her 2025 Form 1040 on Feb 1, 2027 (late) but pays the tax due. Under AEP, she would avoid the failure-to-file and failure-to-pay penalties. She will receive a letter saying relief was applied.
- **Scenario B**: A small business (Form 941) consistently filed and deposited payroll taxes on time for past 12 quarters but misses the July-based deposit once. Because the prior required quarters are clean, AEP may apply.
## Actionable Tips to Prepare
- Review your filing history: confirm that your past three years (or 12 quarters) are fully compliant with no outstanding penalties.
- Ensure all required returns and payments are caught up before deadline. Any slip-ups could disqualify you from AEP.
- If eligible, you *don’t* need to apply. Simply file/pay, and the IRS will handle the rest. Still keep documentation in case of mismatches.
- Stay current on which forms are covered under AEP as IRS guidance may expand or adjust over time.
## What AEP Doesn’t Cover
- Cases involving information-reporting obligations tied to other filings where compliance history doesn’t align with IRS criteria.
- Penalties for severe wilful noncompliance or fraud are not eligible.
- Some types of penalties (e.g., estimated tax underpayment) may still disqualify or limit eligibility.
## Bottom Line
For taxpayers and business filers who’ve been reliably compliant for the past several years, AEP offers a welcome cushion if you slip on filing or payments. But it’s important to maintain clean records, understand what the relief does *and* doesn’t cover, and ensure eligibility before relying on it fully.