What’s Changed: Automatic Exemption from Penalty (AEP)
In July 2026, the IRS replaced the First Time Abate (FTA) program with a new system called Automatic Exemption from Penalty (AEP). (irs.gov)
Key points:
- Applies to eligible returns for tax year 2025, and 2026 quarterly returns, as well as future periods. (irs.gov)
- Must have a history of timely filing and timely payment for the previous three years (or 12 consecutive quarters for quarterly tax payments). (irs.gov)
- Relief is automatic—eligible taxpayers do not need to request it. (irs.gov)
- Penalties applicable include failure to file, failure to pay, and failure to deposit. Interest and other non-eligible penalties still apply. (irs.gov)
- FTA is being phased out; for returns due on or after Jan 1, 2027, AEP fully replaces it. Those unsure of eligibility may still request FTA during the transition. (irs.gov)
How to Know if You Qualify
- Check your federal return history: were all returns filed timely and taxes paid for past 3 years?
- For quarterly filers (e.g., businesses), check that deposits and filings over past 12 consecutive quarters are up to date.
- Ensure you’re filing original returns (amended returns may not qualify) and that returns subject to eligibility (some returns like Form 706 or Form 709 may be excluded). (irs.gov)
Strategy Adjustments for Taxpayers & Advisors
- Small business owners: align your payroll and excise tax deposits; don’t fall behind on quarterly filings—being in compliance gives you automatic relief later.
- Individuals: ensure you file and pay by deadlines, even if you expect refunds or credits—for the record of compliance.
- Tax professionals: advise clients of automatic relief; review prior years’ records to ensure clients qualify.
Practical Examples
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Example A: Alice files her personal tax returns on time, owes small taxes, pays them. For tax years 2022-2024 she has no delayed payments or late returns. Her 2025 return will qualify for AEP—she’ll automatically avoid certain penalties without applying.
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Example B: Bob, a quarterly business filer, missed one quarterly deposit two years ago. He’s not eligible for AEP until those lapses are cured and 12 consecutive compliant quarters pass.
Caveats & Considerations
- Even with AEP, interest accrues on outstanding tax.
- Non-eligible penalties remain—those tied to specific statutory or fraudulent behavior, or for certain return types, aren’t covered. (irs.gov)
- Maintain good digital records—IRS may review history.
- Stay alert: First Time Abate is being phased out, so any planned relief requests should be made before cutoff. (irs.gov)
In summary, AEP is a major relief for compliant taxpayers—minimizing penalty risk and administrative hassle. Build your compliance track record now to benefit automatically.