Compliance
Compliance Advances: IRS Introduces Automatic Penalty Relief System
The IRS is replacing the "First Time Abate" program with a new automatic penalty relief process starting in summer 2026—no action required if you're compliant.
By NomadicTax Research Team • 5-8 min read • August 14, 2026
## What’s Changing: From First Time Abate to Automatic Exemption from Penalty (AEP)
The IRS has announced a **new automatic penalty relief** framework called the *Automatic Exemption from Penalty (AEP)*. Starting summer 2026, this **replaces the old First Time Abate relief** for eligible taxpayers. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
AEP applies to original returns for tax year **2025**, and quarterly returns in **2025-2026**, as well as future periods, provided you have a clean compliance history. ([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, you must typically:
- Have filed and paid taxes on time for the **past three 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))
- Be filing eligible kinds of returns—information returns and returns filed only due to specific or rare events (like estate or gift returns) are generally **not eligible** ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What AEP Does and Doesn’t Do
| **What it does** | **What it doesn’t do** |
|------------------|------------------------|
| Automatically prevents assessment of penalties for failure to file, pay, or deposit **if eligible** | Eliminate interest charges on unpaid taxes—it only covers penalties, not interest on tax underpayments or late payments. |
| No need to request relief—system applies it when processing the return | Does not apply to non-original returns or returns filed only due to special transactions (e.g., Form 706 for estates). |
## Practical Steps to Ensure Eligibility
- Keep accurate records showing you filed and paid on time for recent years.
- Avoid missing payments or filing deadlines for returning or quarterly returns.
- Maintain filing of appropriate returns (e.g., don't rely on special-transaction returns if seeking eligibility).
- If unsure whether you qualify, retain documentation even if no penalty notice arrives (IRS issues confirmation if AEP is granted).
## Example Scenario
> Javier has filed and paid all his tax returns on time for 2022-2024. He files his 2025 individual tax return on time and pays in full. Under AEP starting summer 2026, his return (original 2025 return) will be processed *without assessing late-file or late-pay penalties*, automatically—he won’t need to apply or ask. Interest still accrues on late payments or balances if any remain.
## Additional Changes to Compliance Tools and Credits
Around the same period, the IRS also expanded the **Employer-Provided Child Care Credit** under Section 45F. Those enhancements include raising the maximum credit amount for 2026, increasing rates of credit for qualified small businesses, and expanding eligibility for childcare facility operators. ([irs.gov](https://www.irs.gov/businesses/small-businesses-self-employed/employer-provided-child-care-credit-tax-year-2026-and-later?utm_source=openai))
## Why It Matters Globally
Even if you don’t file US returns, similar trends are being adopted abroad:
- Government tax bodies are moving toward **automatic compliance relief**, reducing burdens on compliant taxpayers.
- Staying on top of your compliance record is increasingly essential—not just to avoid penalties but to benefit from these new programs.
**Actionable**: Confirm your compliance history back through 2023; maintain consistent filing and payment records; check whether any returns you file fall outside AEP eligibility; stay aware of similar penalty relief features or proposals in your country of residence.