Compliance
Automatic Penalty Relief: What Taxpayers Need to Know About the New AEP Program
The IRS is phasing out First-Time Abate and moving to Automatic Exemption from Penalty—this article breaks down who qualifies, what penalties are covered, and how to apply.
By NomadicTax Research Team • 5-8 min read • July 29, 2026
## Introduction
The IRS has introduced a major change in **penalty relief** with the implementation of the **Automatic Exemption from Penalty (AEP)**, starting Summer 2026. The goal is to simplify relief for taxpayers who consistently comply with filing and payment deadlines.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What is AEP and How Does It Replace First Time Abate (FTA)
- **First Time Abate (FTA)** allowed taxpayers with a clean compliance history to request relief from penalties like failure to file or pay. It required a formal request.
- **Automatic Exemption from Penalty (AEP)** removes the need for any action from eligible taxpayers—relief is applied automatically during IRS processing.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- FTA will be phased out; AEP becomes the default for returns with **original due dates 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))
## Eligibility Criteria
To qualify for AEP, taxpayers must:
- Have a history of timely filing returns and paying taxes due for 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))
- Use eligible return types (e.g., Forms **1040, 1065, 1120; 940, 941, 943, 944, 945; CT-1**). Returns tied to specific transactions or infrequent filings (like Form 709, Gift Tax, or Form 706, Estate Tax) are generally **not eligible**.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Penalties Covered by AEP
- **Failure to file** a return.
- **Failure to pay** the tax due by the deadline.
- **Failure to deposit** required tax payments.
These penalties won’t be assessed if AEP applies. Note: interest and non-covered penalties still apply.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## When AEP Takes Effect
- **Summer 2026**: Transition period begins. Some qualifying taxpayers may still get reminders or notices under the old First Time Abate policy.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- For returns due **January 1, 2027 or later**, AEP will be the standard approach. First Time Abate is phased out.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Actionable Advice for Taxpayers and Businesses
- Review your filing and payment history. If you’ve missed deadlines before, take corrective action now.
- For 2025 returns and 2026 quarterly returns, make sure your prior three years’ filings/payments are clean.
- If notices appear—you believe you qualify—contact IRS to correct it if AEP wasn’t applied.
- Stay retroactively compliant—if any prior years have penalties that weren’t abated, get them addressed.
- For tax professionals: advise clients to maintain good records and prompt payments to preserve eligibility.
## Example Scenario
Let’s say you file your 2022, 2023, and 2024 individual tax returns on time, paid any tax due. In 2025, you miss the deadline to pay estimated quarterly taxes for Q1, causing a **failure to pay penalty**. Under AEP, because your past three years were clean, the IRS will **not assess the penalty**, and you’ll receive a notice confirming relief—without any request needed.
## Conclusion
AEP is an important shift toward fairness and simplification. If you qualify, you’ll benefit from automatic relief; if not, it’s time to shore up compliance and understand the rules so that future eligibility is secured. Stay aware, stay timely—this change rewards consistent taxpayers.