Compliance
Automatic Penalty Relief: How IRS’s AEP Streamlines Compliance
The IRS has launched the Automatic Exemption from Penalty (AEP) program, replacing First Time Abate and offering seamless penalty relief to compliant taxpayers.
By NomadicTax Research Team • 5-8 min read • August 28, 2026
## What is the Automatic Exemption from Penalty (AEP)?
As of **summer 2026**, the IRS introduced the AEP program. This new system **automatically grants penalty relief** to eligible taxpayers who have consistently filed and paid on time over the past three years (or twelve consecutive quarters for quarterly filers), eliminating the need to manually request relief under the old 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 applies to:
- “Original returns beginning with tax year 2025,”
- “2026 quarterly returns, as well as future tax periods.” ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Key Differences: AEP vs. FTA
| Feature | Automatic Exemption from Penalty (AEP) | First Time Abate (FTA) |
|---|---|---|
| How relief is obtained | **Automatically**, if eligibility criteria met | **Must be requested** by taxpayer |
| Eligible returns | Original returns for tax year 2025 onward; qualifying quarterly returns | Specific returns, generally not automatically considered |
| History requirement | 3 years of filing and payment compliance (or 12 consecutive quarters) | Same or similar, but relief depends on proactive request |
| Until when FTA applies | Being phased out during 2026 | Still available, but users should expect to transition away |
## Why This Change Matters for Global Taxpayers
With cross-border economic activity increasing, many individuals and entities may have multi-jurisdiction tax obligations. Though **AEP is a U.S.-based program**, it sets a precedent for efficient, taxpayer-friendly compliance mechanisms—reducing administrative friction and increasing predictability. Many global jurisdictions are watching for similar reforms.
## Actionable Steps to Take Now
1. **Evaluate your compliance history**: Do you have 3 years (or 12 consecutive quarters) of timely filing and payment? If yes, you're likely eligible.
2. **Monitor your IRS notices**: If eligible under AEP, you’ll receive notice that a penalty was not assessed—no action needed. If you still get a penalty and believe you qualify, you may need to file an abatement request or contact the IRS. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
3. **Track related changes**: As FTA phases out, learn what forms/returns will no longer be eligible under FTA and how AEP eligibility is determined.
4. **Consult for cross-border implications**: If you're earning income abroad, operating through foreign branches, or using forms tied to withholding or information returns, check whether those returns are eligible under AEP.
## Practical Example
- **Scenario A – Individual taxpayer**: Sarah, a U.S. citizen working abroad and filing her federal taxes on time for 2023, 2024, and 2025, owes an underpayment for 2025 due to a calculation error. Under the **AEP** program beginning in 2026, she should avoid penalties for the underpayment, provided she meets the payment history requirements.
- **Scenario B – Business with quarterly returns**: A U.S.-based small business files quarterly estimates consistently and pays on time for 12 straight quarters through 2025/2026. If a return is late or payments are late, AEP may still prevent certain penalties if eligibility is met.
## Caveats & Special Cases
- Not all returns are eligible—information returns, estate/gift tax, irregular returns may be excluded. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Does **not relieve interest** charges—only penalties for failure to file, pay, deposit where criteria met.
- Always keep documentation showing compliance history; IRS may audit eligibility status.
## Bottom Line
The AEP program is a major win for compliant taxpayers. **Less work**, **more certainty**, and a smoother compliance path. If you're operating globally or managing international operations, similar reforms in other jurisdictions could follow. Staying on top of compliance history and understanding eligibility is more important now than ever.