Compliance
Automatic Penalty Relief Under the New AEP: What Taxpayers Need to Know
The IRS has introduced the Automatic Exemption from Penalty (AEP), replacing the First Time Abate relief to simplify penalty forgiveness for consistent taxpayers.
By NomadicTax Research Team • 6 min read • July 25, 2026
## Overview of the Automatic Exemption from Penalty (AEP)
In July 2026, the IRS rolled out the **Automatic Exemption from Penalty (AEP)** to streamline how penalty relief is granted. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) Under the new system, taxpayers who have a confirmed track record of filing and paying their taxes on time will receive penalty relief **automatically**, without needing to file a request. The AEP replaces the former **First Time Abate** administrative relief. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies for AEP?
To be eligible, taxpayers must satisfy these criteria:
- History of timely filing and paying taxes in the **three prior years** (or 12 consecutive quarters for quarterly filers) ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Original returns for tax year **2025** and beyond, including quarterly returns, are covered. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Exceptions include:
- **Information returns**, or those filed only in response to infrequent events (e.g., Form 706, Form 709) generally are not eligible. ([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 provides relief from certain penalties at the processing stage—including:
- Failure to file penalties
- Failure to pay penalties
- Failure to deposit penalties for eligible taxpayers who meet the requirements. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Note: Only penalties are covered; **interest and the tax owed** are *not* relieved by AEP. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## When AEP Becomes Effective and What It Means Practically
- AEP is fully operational starting **summer 2026**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- It applies automatically—taxpayers don’t need to ask for relief if they’re eligible. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- First Time Abate will begin phasing out, and under most circumstances, for returns with due dates on or after **January 1, 2027**, AEP will replace First Time Abate entirely. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical Tips for Taxpayers and Tax Professionals
- **Maintain clean compliance history**: Filing and paying your tax obligations on time for three years straight will make you eligible automatically.
- **Check recent penalties and unpaid taxes**: If you had a penalty recently, especially for missing deadlines or underpayment, AEP might apply—but double-check the nature of the return.
- **Don't rely on estimates**: The IRS will send a notice if AEP was applied. Review communications carefully.
- **Keep up with updates**: For returns or penalties outside standard eligibility (e.g., estate, gift, information returns), reasonable cause arguments may still apply.
## Case Example
**Scenario A**: Jane filed her 2022, 2023, and 2024 income tax returns on time and paid all taxes due. In early 2025 she files a return late inadvertently. With AEP in effect, that late-filing penalty for her 2025 return could be automatically exempted without her needing to apply.
**Scenario B**: A quarterly business taxpayer has been consistent for 12 consecutive quarters. One quarter in 2025 was late. Under AEP, the failure-to-deposit penalty for that quarter may be waived, assuming no other disqualifying factors.
## Why This Matters
- **Reduced burden**: No need to request relief for each eligible penalty.
- **Fairness and consistency**: Encourages compliance and recognizes taxpayers who consistently meet deadlines.
- **Clearer expectations**: Taxpayers and professionals can plan knowing relief is automatic if eligible.
AEP simplifies an often confusing relief pathway—ensuring peace of mind and financial savings for eligible taxpayers, while pushing the IRS toward more efficient administration.