Compliance
Automatic Exemption from Penalty (AEP): What U.S. Taxpayers Need to Know
The IRS is replacing First Time Abate with an automatic relief program starting Summer 2026—here’s how it changes penalty relief.
By NomadicTax Research Team • 5-8 min read • August 16, 2026
## What Is AEP and Why It Replaces First Time Abate
In summer 2026, the IRS introduces the **Automatic Exemption from Penalty (AEP)**, replacing the earlier First Time Abate (FTA) program. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) AEP allows taxpayers with consistent compliance history to avoid certain late penalties without filing special requests or forms. It applies automatically when eligible. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Key Criteria for Eligibility
To qualify for AEP, taxpayers must meet all of the following:
- A history of timely filing and payment for the **three prior years** (or 12 consecutive quarters for quarterly filers).
- Not having had unexcused late filings in those periods, except for reasonable cause or where penalties were assessed but later abated. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- The return must be an **original return**, tax year 2025 or later; quarterly returns in 2026 or later also qualify. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Penalties Are Covered and What’s Not
### Covered penalties (no assessment during processing):
- Failure to file penalties (e.g., missing due date for 1040, 1120, etc.) ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Failure to pay penalties related to tax shown on return or amount on notice. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Failure to deposit penalties (e.g., payroll or excise tax deposits). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Penalties NOT covered:
- Accuracy-related penalties (e.g. misreporting income). ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- Information return penalties (e.g. missing 1099s, W-2s). ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- Penalties assessed before AEP takes effect for given period. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Practical Effects & What This Means for You
- AEP is **automatic**—you don’t need to request the relief. Just file and pay (or deposit) on time in the current year while maintaining good history. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- You’ll receive a **notice** from IRS confirming that applicable penalties were *not assessed* because you qualified. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- If you get a penalty notice but believe you qualified, you’ll need to reach out—there’s still recourse. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Transition Timeline
| Period | Relief Program Applied |
|--------|-------------------------|
| Tax year 2025 returns and 2026 quarterly returns | Eligible for AEP once it takes effect; earlier returns may still use FTA if processed before AEP start. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))|
| Returns or quarters beginning Jan 1, 2027 or later | AEP is the only option—FTA ends. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))|
## Example Scenario
Sarah is a small business owner who has filed Form 1065 timely and paid any taxes due for the past three years. In Q2 2026, she misses the deposit deadline for payroll taxes. Because she has timely history, AEP means the **failure-to-deposit penalty won’t be assessed**. She does *not* need to file Form 843 or contact IRS proactively—she will later receive a notice saying relief was granted.
**Bottom line:** AEP simplifies penalty relief for reliable taxpayers. Stay well organized, file properly, and let the system do the rest.