Compliance
How Penalty Relief is Changing: The IRS’s Automatic Exemption from Penalty (AEP) Explained
The IRS is replacing First Time Abate with a new systemic relief program called AEP, offering automatic penalty exemptions for eligible taxpayers—no request needed.
By NomadicTax Research Team • 5-8 min read • August 2, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
The Automatic Exemption from Penalty (AEP) is a new IRS relief program introduced in **summer 2026** that automatically waives certain penalties for taxpayers with a history of timely filing, paying, and depositing. It replaces the older First Time Abate (FTA) relief for most situations. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies?
You may qualify for AEP if you meet all of the following conditions:
- A history of timely filing returns and paying taxes for the prior **three years**, or if you're a quarterly filer, **12 consecutive quarters** ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- You file an **eligible original return** (Forms like 1040, 1065, 1120, etc.) or eligible quarterly returns for tax years starting with **2025** and quarterly returns in **2026** onward ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- The penalties you’d be covered for include failure to file, failure to pay, and failure to deposit penalties—but **not all penalties** (e.g. no accuracy-related or information-return penalties) ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
## What Ends With AEP? Transition From First Time Abate
- **First Time Abate (FTA)** remains available only for returns that are not eligible for AEP—typically older returns or certain quarterly ones in early 2025 before AEP is fully in effect. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Starting **January 1, 2027**, FTA will be phased out for eligible returns with original due dates on or after that date. AEP will be the primary relief method. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## How It Works and What You Need to Do
No action required—if you meet eligibility, **AEP is applied automatically** when your return is processed. You’ll receive a notice confirming the relief if successful. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
If you don’t qualify for AEP:
- Might still request relief based on **reasonable cause**, like illnesses or disasters. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- Ensure returns are properly filed and all required deposits/payments are timely to build eligibility over time.
## Practical Examples
- **Individual taxpayer**: Jane filed Forms 1040 on time for 2022-2024, paid all income tax due. If she files her 2025 return late, **no failure-to-file penalty** for that return under AEP.
- **Small business (quarterly filer)**: A sole proprietor with 12 consecutive timely quarterly returns through Q4 2025, who misses one deposit in Q1 2026, could have that penalty automatically exempt under AEP.
- **Business with mixed penalties**: If a corporation has been late on withholding payroll taxes multiple times in the past, it may fail to qualify—AEP excludes frequent failures under certain deposit penalty rules. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
## Key Actions to Take
- Maintain consistent timely filings, payments and deposits—this builds or holds eligibility.
- Monitor IRS notices—if AEP is applied you’ll receive a letter, but if not, it’s often for good reason.
- Understand what penalties are **not** covered: accuracy, information-return penalties, etc.
- Consult a tax professional if unsure whether your specific situation qualifies or if relief under reasonable cause may apply.
**Bottom line**: AEP is a major shift toward simpler, fairer penalty relief—rewarding long-compliant taxpayers with automatic exemptions instead of requiring requests.