Compliance
Automatic Penalty Relief and State & Local Tax Deduction Corrections Under New IRS Rules
New IRS announcements streamline penalty relief for compliant taxpayers and correct SALT deduction limits on 2026 estimated tax payments—essential for individual tax compliance.
By NomadicTax Research Team • 5 min read • September 7, 2026
## Automatic Exemption from Penalty (AEP): Simplifying Relief for Small Mistakes
In July 2026, the IRS introduced the **Automatic Exemption from Penalty (AEP)** rule, replacing the older *First Time Abate* program. Under AEP, if a taxpayer has been punctual in filing and paying for the past three years—or done the same over four consecutive quarterly returns—they may automatically qualify for relief from penalties for:
- Failure to file
- Failure to pay
- Failure to deposit taxes
Importantly, you **don’t need to request relief**—if you’re eligible, the IRS will apply it during processing and send a notice confirming it. This applies starting with tax year **2025** and the 2026 quarterly returns—and onward. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Who benefits most?
- Sole proprietors, freelancers, or micro-businesses who usually file and pay on time but occasionally slip up.
- Individuals who are consistent with quarterly estimated payments.
### Limitations & What to Know
- Not all returns or returns tied to rare or infrequent legal filings are eligible (e.g. gift tax forms, estate tax).
- Penalties will still apply if due process fails—for instance, persistent missing returns and no history of compliance.
## Correction to SALT Deduction Reminder on Form 1040-ES
The IRS updated a reminder in **2026 Form 1040-ES** regarding the **State and Local Tax (SALT) deduction limit**. Key points:
- The overall SALT limit for 2026 is **$40,400** (or $20,200 if married filing separately).
- The limit phases out for taxpayers whose Modified Adjusted Gross Income (MAGI) exceeds $505,000 (or $252,500 if married filing separately). The deduction also cannot drop below **$10,000** ($5,000 MFS). ([irs.gov](https://www.irs.gov/forms-pubs/correction-to-state-and-local-income-tax-deduction-amount-in-the-2026-form-1040-es?utm_source=openai))
## Implications & Action Items
- **Re-evaluate withholding or estimated payments** now that SALT caps and thresholds are known, especially if high SALT burdens.
- **Check notices or penalties received**: if you got one for a failure covered by AEP and you meet the eligibility, you may not need to respond—it may be automatically removed.
- **Document compliance history**, especially filing and payment timeliness—this becomes your eligibility track record.
## Why These Changes Matter
- Helps reduce burdens on taxpayers who generally comply but had occasional mishaps.
- Improves clarity around SALT deductions as taxpayers plan their finances.
- Encourages keeping accurate records and using updated forms and guidance.
## Bottom Line
If you filed and paid consistently over the past three years, you might no longer need to jump through hoops for penalty relief—IRS is making it automatic. And with the SALT limits clarified, you can more accurately estimate your fiscal liability and avoid surprises. Keep an eye on notices though—eligibility doesn’t expire retroactively.