Compliance
Compliance Simplified: Navigating the IRS’s New Automatic Penalty Relief
IRS now gives penalty relief automatically for historically compliant taxpayers—no need to apply manually for First Time Abate; this article helps you determine eligibility and adjust your compliance strategy.
By NomadicTax Research Team • 5-8 min read • July 30, 2026
## 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
**Key points:**
- Applies to eligible returns for tax year **2025**, and **2026 quarterly returns**, as well as future periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Relief is automatic—eligible taxpayers do **not** need to request it. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Penalties applicable include **failure to file**, **failure to pay**, and **failure to deposit**. Interest and other non-eligible penalties still apply. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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## 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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## 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.
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## Practical Examples
- *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.
- *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.
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## 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
**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.