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)
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)
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)
- 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)
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)
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.