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)
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)
- 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)
- 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)
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)
- 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)
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)
If you don’t qualify for AEP:
- Might still request relief based on reasonable cause, like illnesses or disasters. (irs.gov)
- 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)
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.