Compliance

Automatic Penalty Relief: What IRS’ New AEP Means for Compliant Taxpayers

IRS has replaced First Time Abate with Automatic Exemption from Penalty for 2025-2026 returns—this article breaks down who qualifies, what penalties are covered, and how to prepare.

By NomadicTax Research Team • 5-8 min read • August 13, 2026

## What Is the New AEP The **Automatic Exemption from Penalty (AEP)** is a fresh IRS program, beginning summer 2026, designed to simplify penalty relief by **automatically removing certain penalties** for taxpayers with documented, reliable tax compliance history. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) It replaces the “First Time Abate” (FTA) relief, which required taxpayers to proactively request penalty waivers. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) ## What Penalties Are Affected AEP applies to eligible returns and periods, specifically for original returns in tax year **2025 and 2026 quarterly returns**, and all future qualifying periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) It covers: - Failure‐to‐file penalties, - Failure‐to‐pay penalties, - Failure‐to‐deposit penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) Some types of returns are **not eligible**, such as certain information returns, estate or gift tax returns (e.g., Form 706, Form 709) and transaction‐driven returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) --- ## Who Qualifies To qualify for AEP, you generally need a strong track record of: - Filing and paying **on time for the prior three years**; or - For quarterly filers, timely compliance in **12 consecutive calendar quarters**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) If you meet these criteria, you don’t need to file any relief request—the IRS will grant relief **automatically**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) If you're unsure of eligibility, you may request the old First Time Abate during the **transition period** (2025-2026). After 2026, FTA will be fully phased out. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) --- ## Timeline & Effective Dates - **Summer 2026**: AEP begins operating for eligible returns. Notice confirming relief may be sent. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) - First Time Abate still available during 2025-2026 for taxpayers who believe they qualify. Fully replaced by AEP for returns due on or after **January 1, 2027**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) --- ## What You Should Do - Review your past filing/payment history: ensure you were compliant in the three past years or 12 past quarters. - Even if compliant, **still pay your taxes & interest in full**—AEP is about penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) - Watch for IRS notices confirming that AEP was applied. Save them in case of disputes. - If you believe you qualify yet got a penalty notice, verify eligibility and, if needed, contact IRS for correction or use First Time Abate if still in transition. --- ## Examples **Example 1:** Sarah, a married taxpayer, has filed correctly and fully paid her taxes in 2023, 2024, 2025. In Q1 and Q2 of 2026 she filed estimated taxes timely. In Q3 2026, she missed the estimated payment, incurring a failure‐to‐pay penalty. Under AEP, since she meets prior years’ history, IRS may automatically remove that penalty. However, **interest still accrues** until paid. **Example 2:** Joe is self‐employed who missed a quarterly filing in 2025, so he doesn’t meet the 12 consecutive quarters requirement for 2026. He’ll receive a penalty notice if he fails to file or pay. But he may still request First Time Abate or show reasonable cause if eligible. After Jan 1, 2027, only AEP will apply—FTA will be phased out. --- ## Impacts & Takeaways - **Lower burden**: fewer paperwork and requests for taxpayers who have strong compliance history. - **Predictability**: eligible taxpayers can rely on not being penalized for certain late filings/payments. - **Estate, gift, information returns still need vigilance**, as many are ineligible. --- ## Summary The AEP marks a significant shift in administrative penalty relief—if you’ve been compliant, this change works in your favor automatically. For travelers, small business owners, self‐employed, and wage earners, understanding the requirements, staying compliant, and keeping documentation ensures you’ll benefit and avoid unexpected penalties.