Compliance
Automatic Exemption from Penalty: A Game-Changer for Tax Compliance
IRS’s new process means consistent penalty relief for those who’ve been good citizens—no more applying for First-Time Abate.
By NomadicTax Research Team • 5-8 min read • July 11, 2026
## What is the Automatic Exemption from Penalty (AEP)?
Starting in **summer 2026**, the IRS is introducing the *Automatic Exemption from Penalty* (AEP), a program that **automatically waives certain penalties** if taxpayers meet basic compliance criteria. It replaces the existing *First Time Abate* relief, simplifying the process and reducing paperwork. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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## Who qualifies and what kind of penalties are covered
To be eligible for AEP, you must:
- Have a clean record of **timely filings and payments** for all tax years in the past three years (or 12 consecutive quarters if filing quarterly) ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- File an **original return** (not amended), for tax years **2025 and 2026**, or future tax periods ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Penalties that can be automatically waived under AEP include:
- Failure to file
- Failure to pay
- Failure to deposit
Exceptions:
- Information returns
- Special-event returns like Form 706 or 709 (estate and gift tax) are generally not covered ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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## Timeline and transition details
- AEP begins **summer 2026**, applying to eligible returns for **tax years 2025 and 2026**, and beyond. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- First Time Abate won’t disappear overnight. There's a transition period during which taxpayers may still be eligible to receive First Time Abate relief for 2025 or 2026 returns if they qualify. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Effective replacement: AEP becomes the primary administrative relief for eligible returns with original due dates **on or after January 1, 2027**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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## Practical example: How this works in real life
Imagine Jane, who has on‐time filings and all payments made for tax years 2022—2024. She files her 2025 original income tax return late and has a minor delinquent payment on a quarterly return.
- Under the old First Time Abate, Jane would have to **request relief**, often providing documentation or explanation.
- Under **AEP**, she doesn’t need to ask. If she meets the eligibility criteria, the IRS will **automatically waive** the late-filed and failure to deposit penalties. She’ll receive a notice confirming relief has been granted. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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## What to do if you don’t qualify or disagree
If AEP doesn’t apply:
- You may still request penalty relief under the **reasonable cause** standard. Document your situation—illness, natural disaster, serious hardship. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Keep accurate records—payments, filing dates, notices—that show your history.
- Make sure to still **file on time**. AEP only prevents penalties; it doesn’t eliminate the obligation to pay taxes and interest. Late payment or nonpayment still accrues interest and possibly other penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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## Key takeaways and actionable steps
- **Check whether you qualify**: look at your last three years of returns/payments or last 12 quarterly filings.
- For 2025 and 2026 returns, simply filing on-time will often be enough to trigger AEP relief—no separate request required.
- If you’re used to relying on First Time Abate, plan ahead: after Jan 1, 2027, the automatic approach becomes standard.
- Businesses, quarterly filers, anyone with prior late filings: double check deadlines, establish a solid history now.
**Bottom line:** AEP is a big shift toward fairness in the US tax system—rewarding those who file and pay on time with relief you don’t need to apply for. It’s proactive, not reactive.