Compliance
How the Automatic Exemption from Penalty (AEP) Changes IRS Penalty Relief
IRS’s new AEP gives qualified taxpayers relief from certain penalties without trigger-requests—here’s how it works and what taxpayers must do to benefit.
By NomadicTax Research Team • 5-8 min read • August 23, 2026
## What Is Automatic Exemption from Penalty (AEP)?
The **Automatic Exemption from Penalty (AEP)** is a new IRS program launched in Summer 2026 which replaces the old “First Time Abate” (FTA) relief. Under AEP, taxpayers who have historically complied (filing, paying, depositing on time for three prior tax years or twelve prior consecutive quarters for quarterly filers) will be automatically exempted from assessment of certain penalties when returning tax paperwork late or paying late. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Penalties Covered & Not Covered
AEP prevents assessment of three categories of penalties during original return processing:
- Failure to file (late filing)
- Failure to pay (late tax payment)
- Failure to deposit (for required tax deposits) ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
However, **AEP does not cover**:
- Daily delinquency penalties (for continuing late filings)
- Accuracy-related penalties or penalties for substantial understatement;
- Information return-related penalties (e.g., Form 1099 reporting failures, FBAR etc.) ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Who Qualifies & For Which Periods?
To be eligible, taxpayers must have a track record of:
- Timely filed required returns and paid tax due for the **3 prior years**, or for **quarterly filers**, 12 consecutive prior quarters. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- The relief begins applying to tax year **2025 original returns**, 2026 quarterly returns, and forward. For returns due Jan 1, 2027 or later, only AEP applies and FTA is discontinued. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Taxpayers Should Do
- No action required; IRS will apply AEP *automatically* for those who qualify. Watch for notices confirming non-assessment of penalties. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- If IRS sends a penalty notice but you believe you qualified for AEP, you should **contact IRS** to resolve. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?os=vbkn42tqhoorjmxr5b&utm_source=openai))
- Continue filing returns, paying taxes, and making required deposits on time; failing to do so interrupts the eligibility window. Accuracy and information return penalties aren’t covered so compliance in all areas still matters.
## Practical Example
Let’s say Jane has filed and paid her 2022, 2023, and 2024 tax returns on time. In 2025, she misses the April deadline and files on October 15 with payment made then. Under AEP, **if she qualifies**, she will **not receive a failure-to-file or failure-to-pay penalty** for her 2025 return. But if she had prior issues, or misses in other reporting like her FBAR or misreports 1099s, those penalties still may apply.
## Why This Matters
- **Reduced friction**: no need to file discretionary relief requests for common penalties.
- **Predictability**: taxpayers with clean histories can forecast lower risk of penalty in partial noncompliance.
- **Transition-period considerations**: while FTA may still apply in certain qualifying 2025/2026 quarterly returns, AEP becomes the standard for returns due in 2027 and after.
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Category: Compliance
TaxHome: US
Author: NomadicTax Research Team
ReadTime: 6 min
Published: true