Compliance
Automatic Exemption from Penalty (AEP): What It Means for You
IRS is replacing First-Time Abate with Automatic Exemption from Penalty starting summer 2026—eligible taxpayers get relief automatically without having to apply.
By NomadicTax Research Team • 5-8 min read • July 18, 2026
## Overview of the New AEP Program
Starting **summer 2026**, the IRS is phasing in the **Automatic Exemption from Penalty (AEP)**, which will replace the First-Time Abate (FTA) program for eligible original returns with due dates on or after **January 1, 2027**. During the transition period, AEP will apply to original tax-year 2025 returns and 2026 quarterly returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Taxpayers qualify if, for the **three prior years** (or **12 consecutive quarters** for business/quarterly returns), they:
- Filed required returns on time;
- Paid taxes due on time;
- Made required deposits on time (for businesses); and
- Did not receive certain deposit penalties repeatedly. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
The relief covers failures to file, pay, or deposit—but **not** all penalties, such as accuracy-related penalties, daily delinquency, information-return penalties, or event-based/infrequent returns like estate (Form 706) and gift (Form 709) returns. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Why This is Important
- **Lower burden**: Previously, taxpayers had to be aware of First-Time Abate and request it; now, relief is automatic if eligibility criteria are met. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- **Fairness**: Everyone with a good compliance history gets the same benefit—whether self-filing or represented.
- **Service improvements**: IRS will send a notice confirming when the relief applies; less letters, calls, and uncertainty. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
## Practical Examples
| Scenario | Eligibility Criteria Met | AEP Applies? |
|---|---|---|
| Individual filed timely for 2022-2024, paid taxes due, then 2025 file was late but meets criteria | Yes | **Yes**—no failure-to-file or failure-to-pay penalties assessed for 2025 return. |
| Business with 12 consecutive quarterly filings and timely deposits, but in one quarter missed deposit | That one fails the deposit test | **No**—business must meet deposit history criteria. |
| Late estate tax return for Form 706 | Infrequent/event-based return | **No**—Form 706 generally excluded under the rules. |
## What You Should Do
- Review your compliance history for the past three years (or 12 quarters) now
- Make sure required returns are filed and taxes paid/deposits made
- File potential First-Time Abate requests if an eligible return from 2024 or any pre-AEP period was penalized and you qualify.
- Keep documentation showing timely filings/payments in past years in case IRS requests.
## Summary
AEP represents a meaningful shift in IRS penalty relief: automatic, equitable, and easier for well-behaved taxpayers. If you've been up to date with your filings and payments, you may benefit without lifting a finger—and it’s well worth checking if you qualify.