Compliance
Automatic Penalty Relief: A Game-Changer for Eligible Taxpayers
The IRS introduces the Automatic Exemption from Penalty (AEP) to replace First Time Abate, offering relief automatically for qualifying filers without needing to request it explicitly.
By NomadicTax Research Team • 5-8 min read • July 9, 2026
## What Is AEP and Who Qualifies
The new **Automatic Exemption from Penalty** (AEP) starts in **summer 2026**, replacing the First Time Abate (FTA) program. It’s designed to relieve penalties for those with a consistent record of on-time filing and payment. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
To **qualify**, taxpayers must have timely filed and paid all required returns for three prior tax years (or twelve consecutive quarters for quarterly returns). Eligible returns include:
- Individual returns (1040)
- Partnership (1065), corporation (1120) returns, and certain payroll/excise filings ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?os=roku...&utm_source=openai))
**Ineligible** returns include one-time or infrequently filed forms (e.g. estate tax, gift tax returns); those involved with information returns tied to unique transactions are also excluded. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Effective Timing and Transition Rules
- Relief applies **automatically** to original returns for **tax year 2025**, quarterly returns in **2026**, and future periods, if eligible. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **First Time Abate** remains available during the transition but will be fully phased out for 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))
## What Penalties Are Covered
AEP can exempt taxpayers from penalties related to:
- Failure to file
- Failure to pay
- Failure to deposit (for eligible forms) ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Note: **Interest** on unpaid tax still applies, and some penalties—like repeated deposit failures or information return penalties—aren’t eligible. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?os=roku...&utm_source=openai))
## Actionable Steps to Benefit
- **Verify your compliance history** for the past three years. Any lapses could disqualify you.
- **File your 2025 returns** accurately and on time, if you haven’t already.
- Keep up timely filings and tax payments throughout **2026**, especially quarterly returns.
- When receiving IRS penalty notices, check if the assessed penalties align with AEP eligibility and contact IRS if you believe they were wrongly assessed.
## Why It Matters
- **Less paperwork and administrative burden**: No need to file requests for relief.
- **More fairness**: Leveling the playing field for those unaware of or unable to request First Time Abate.
- **Improved trust** in tax administration for regular, compliant taxpayers.
This change reflects the IRS’s commitment to simplifying tax compliance and reducing unnecessary stress for taxpayers with strong compliance records.
**Examples**:
1. Jane files all 2021–2023 returns on time and pays all taxes due. In 2025, she misses the April deadline by a few days. Under AEP, no failure-to-file penalty will be assessed automatically.
2. ACME Corp makes its quarterly payroll tax deposits timely for twelve straight quarters but misses one in 2026. If eligible otherwise, that penalty might be exempt under AEP.