Compliance
Automatic Penalty Relief in the U.S.: How the IRS’s New AEP Impacts Your Tax Compliance
The IRS is rolling out an Automatic Exemption from Penalty (AEP) starting summer 2026, replacing the First Time Abate relief. Learn who qualifies, what penalties are covered, and how to prepare.
By NomadicTax Research Team • 5-8 min read • July 20, 2026
## What is AEP and Why It Matters
In **July 2026**, the IRS introduced the *Automatic Exemption from Penalty (AEP)*. This program is part of a shift in how penalty relief works. Instead of filing a request under First Time Abate, taxpayers who have a history of filing and paying on time may be **automatically exempted from certain penalties**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
This is significant because it reduces paperwork, eliminates delays, and ensures fairness in the application of relief to compliant taxpayers.
## Who Qualifies for AEP
To be eligible, taxpayers must meet both of these conditions:
| Criteria | Period | Details |
|---------|---------|---------|
| **Original returns** or **quarterly returns** | Tax years **2025 and later**, including 2026 quarterly returns | AEP starts with these years. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
| **Three full prior years (or 12 quarters)** | History of filing and paying on time | Includes no failures to file, no failures to pay, and no failures to deposit. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
## What Penalties Are Covered Under AEP
If you qualify, penalties **won’t be assessed during processing** for:
- Failure to file
- Failure to pay
- Failure to deposit
However, interest still accrues, and penalties not eligible for relief will still apply. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What AEP Replaces: First Time Abate
The old program, *First Time Abate*, required taxpayers to apply when they met similar criteria. AEP **automates** this process. During the transition (summer 2026), First Time Abate may still apply for some returns. After **January 1, 2027**, First Time Abate will be fully replaced by AEP for eligible returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical Examples & Guidance
- **Example 1:** Jane has filed taxes on time and paid owed taxes for tax years 2022–2024. She files her 2025 original return timely. Under AEP, she **would not need to request penalty relief**—even if penalties normally apply.
- **Example 2:** Ben missed a quarterly deposit in late 2024, so he doesn’t meet the full 12-quarter criteria. He’ll need to rely on *reasonable cause* relief or other options.
## Action Steps to Prepare
- Review your last three years or 12 quarters of filings and payments to confirm eligibility.
- If you're unsure, retain documentation like payment receipts and filing confirmations.
- Even if AEP doesn't apply, know that you can still apply for *reasonable cause* penalty relief.
- From Jan 1, 2027, expect First Time Abate to no longer be available for eligible returns—so plan accordingly.
## Key Takeaways
- AEP simplifies penalty relief for compliant U.S. taxpayers.
- It starts with tax years 2025/2026 and becomes fully effective Jan 2027.
- If you meet the criteria, nothing special is required; relief happens automatically.
- Otherwise, other avenues for relief still exist—but may require more effort.
By staying aware of these changes and reviewing your compliance history, you can avoid unexpected penalties and streamline your tax planning.