What is the Automatic Exemption from Penalty (AEP)?
The IRS announced in July 2026 that it is replacing the First Time Abate administrative relief with a new Automatic Exemption from Penalty (AEP) for individuals who meet certain compliance criteria. This shift means that eligible taxpayers will no longer need to request penalty relief—it will be applied automatically. (irs.gov)
Who is eligible under AEP?
To qualify for AEP, taxpayers must:
- have a history of filing returns and paying taxes on time for the three prior years (or 12 consecutive quarters for quarterly filings) (irs.gov),
- file original returns for tax years 2025 and 2026 and subsequent periods, including quarterly returns where applicable (irs.gov),
- receive the relief automatically—no action required if you meet the criteria. However, some returns are excluded, such as information returns or infrequent filings like gift tax or estate returns. (irs.gov)
What penalties are covered by AEP?
When AEP applies, certain penalties will not be assessed during the processing of returns relating to:
- failure to file (late returns)
- failure to pay (late payments)
- failure to deposit required payments (such as payroll taxes) (irs.gov)
Important note: Interest and non-covered penalties are still enforceable under existing law. Taxpayers should also know that although some may still receive penalty notices during the transition period, if they feel eligible, they can contact the IRS about First Time Abate during this overlapping period. (irs.gov)
Transition timeline and phase-out details
- AEP will begin in summer 2026. (irs.gov)
- First Time Abate will be phased out and largely replaced by AEP for returns with due dates on or after January 1, 2027. (irs.gov)
Practical Examples & Actionable Advice
| Scenario | Under Old System | With AEP | Your Best Move Now |
|---|---|---|---|
| Consistently filed income tax returns, always paid on time | Needed to apply for First Time Abate if a penalty was assessed | Penalties automatically waived for eligible failures (file/pay/deposit) | Review your compliance history; make sure you meet eligibility before the tax season. |
| Missed deposit of payroll tax once, previously | Would request relief manually, maybe granted if first time | If history is clean, penalty not assessed in the first place | Ensure payroll tax deposits are timely and your past 3 years have no major issues. |
| Handle an executor estate or gift tax return (rare type) | Not eligible for First Time Abate in some cases | AEP excludes many such abnormal returns | Understand which classes of returns are excluded; don’t assume eligibility. |
Actions You Should Take
- Review your recent tax compliance record to ensure you’ve filed and paid on time for the past 3 years (or four quarters). If you discover gaps, correct them before tax season.
- Monitor IRS notices even if you expect AEP to apply—some returns might still trigger legacy systems temporarily during transition.
- Seek advice if you’re unsure: tax professionals or advisors can help assess whether exclusions apply in your situation.
- Document your actions: keep proof of filing dates and payment submissions to support eligibility.
Why this matters: For compliant taxpayers, AEP reduces administrative burden and uncertainty. No more tracking down First Time Abate requests—IRS’s new system should recognize consistent compliance automatically, lifting a barrier many found opaque.
Written by the NomadicTax Research Team