Compliance
Automatic Penalty Relief (AEP): What You Need to Know Before Filing
The IRS's new Automatic Exemption from Penalty reshapes how failure-to-file and failure-to-pay penalties apply—learn who qualifies, how it works, and what still requires action.
By NomadicTax Research Team • 5-8 min read • September 9, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
In summer 2026, the IRS introduced the **Automatic Exemption from Penalty (AEP)** program. It replaces the First Time Abate (FTA) relief for eligible taxpayers and automatically prevents certain penalties from being assessed if specific criteria are met. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Penalties Covered Under AEP
- For **individuals**: failure-to-file & failure-to-pay penalties may be prevented. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
- For **businesses**: failure-to-file, failure-to-pay, and failure-to-deposit penalties may be prevented. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies?
| Taxpayer Type | Requirement |
|----------------|--------------------------|
| Individual filing annually | Timely filed returns and timely paid taxes for the prior 3 tax years |
| Quarterly filers / businesses | 12 consecutive quarters of timely filing and tax deposit or payment history |
Not available for returns related to infrequent events—such as Form 706 (estate taxes), or Form 709 (gift taxes). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## How It Works: Process & Effective Dates
- IRS will **automatically identify qualifying taxpayers**. No need to apply or request relief. Notices will be sent when penalties are *not* assessed due to AEP. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
- Effective for original returns with due dates from **January 1, 2027** onwards. Transition period includes eligible original returns for 2025 and 2026 quarterly returns but some may still receive notices before full implementation. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What AEP Doesn’t Do
- It **doesn’t erase any interest** due or penalties not eligible for relief. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- It doesn’t apply to certain non-routine returns (estate, gift, transactions only triggered by specific events). ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
## Action Steps: Stay Ahead Under AEP
- Don’t wait: make sure returns for 2023-25 and payments are filed and paid on time if possible. Late or missing returns/payment history may disqualify you.
- If you receive a penalty notice for returns that should have been through AEP, respond using First Time Abate or reasonable cause relief if applicable. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Keep proof of timely filings & payments—IRS matching during transition period might require verification.
- Check notices: If you’ve been eligible but didn’t get the AEP notice, you may still be eligible to request relief.
## Example Scenario
Sarah, a sole proprietor, has filed and paid all her 2022, 2023, and 2024 returns on time. In Q1-Q2 2026, she also made timely quarterly payments. Under AEP, if Sarah files her 2025 return by the deadline and continues timely payments, she should qualify for auto relief from failure-to-file and failure-to-pay penalties. No action required.
## Key Takeaways
- AEP shifts the burden **from taxpayer to IRS** for eligible cases—less paperwork and fewer requests.
- Good compliance history matters now more than ever.
- Stay informed during the transition period—some penalties notices may still occur before AEP is fully enforced.
By aligning your filings and payments in advance, you’ll be positioned to benefit automatically from AEP when it becomes fully active.