Compliance
Compliance Simplified: How the IRS Automatic Penalty Relief (AEP) Changes the Game
As of summer 2026 the U.S. IRS is phasing in Automatic Exemption from Penalty (AEP), replacing First Time Abate for eligible filers—streamlining relief for failure fee penalties. Here’s how it works, who qualifies, and what you should do now.
By NomadicTax Research Team • 5-8 min read • September 6, 2026
## What is AEP & What Changed
In **July 2026**, the US Internal Revenue Service (IRS) introduced **Automatic Exemption from Penalty (AEP)**—a simpler, automatic alternative to the traditional **First Time Abate (FTA)** relief. AEP applies to eligible returns from **tax year 2025**, **2026 quarterly returns**, and future periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Under AEP, eligible taxpayers **do not need to request relief**: penalties for failure to file, pay, or deposit are automatically waived if eligibility conditions are met. FTA is being phased out and will no longer apply for original returns with 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))
## Who Qualifies for AEP
- Individuals or businesses with a strong compliance history (e.g. timely filing & payment) for the prior **three years** or **12 consecutive quarters** (for quarterly filers). ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
- Returns must be **original**, timely filed, and for tax periods eligible under the new program. Some returns—like information returns or infrequent event returns (e.g. estate or gift tax returns)—are not eligible. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Penalties are Covered vs Not Covered
| Covered | Not Covered / Ineligible Returns |
|---|---|
| • Failure to file penalty • Failure to pay penalty • Failure to deposit penalty (for business taxpayers) | • Infrequent event returns (e.g. Form 706, 709) • Returns filed only due to specific transactions • Penalties not tied to filing/pay/deposit failures |
Even if penalties are forgiven, **interest** still accrues on any unpaid tax. Taxes due must still be paid. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What You Should Do Now
- **Check your history**: Ensure that for the past three years (or relevant number of quarters) you’ve filed and paid on time.
- **Don’t take irrelevant actions**: Since the IRS will apply AEP automatically if eligible, you don’t need to request relief for returns eligible under AEP.
- **Monitor notices**: IRS will send confirmation notices when AEP relief has been applied.
- **Still document others**: For non-eligible returns or taxpayers, you’ll need to make reasonable cause arguments or still rely on First Time Abate while still active.
## Example
Suppose you’re a small business owner who filed and paid taxes timely in tax years 2022-2024. You file your 2025 return by the deadline in 2026. If your 2025 return is original and you pay on time, you won’t receive a failure-to-file penalty—IRS will apply AEP automatically. You’ll get a notice confirming the relief. But if you missed filing in 2024, you’d lack eligibility.
## Implications & Benefits
- **Reduced administrative burden**: No need to apply for relief.
- **Predictability**: Taxpayers can reasonably expect relief when they maintain good compliance.
- **Fairer treatment**: Treats historically compliant taxpayers more favorably and consistently.
## Caveats and Watch-Outs
- Doesn’t replace all relief options. “Reasonable cause” exceptions still exist.
- Transitional period may lead to confusion; early returns in 2025/2026 may still show penalties if processed before AEP system fully implemented. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
- You must still pay interest and any non-eligible penalties.
## Final Word
For the disciplined and compliant taxpayer, AEP represents a welcome relief—reducing paperwork, ensuring fairness, and offering confidence in future transactions. Keep up your filing and payment history, and let the system work to your advantage.