Introduction
Starting summer 2026, the Internal Revenue Service rolled out the new Automatic Exemption from Penalty (AEP) program, signaling the phase-out of the First Time Abate (FTA) policy. This change has major implications across the U.S. tax landscape, offering built-in relief for individuals and businesses with a solid compliance record. (irs.gov)
What is AEP and Who Qualifies
Under AEP, eligible taxpayers will automatically avoid certain penalties if they’ve consistently filed and paid on time. Qualifying generally means:
- For individuals: timely filed required returns and paid any tax due for the prior 3 years. (irs.gov)
- For businesses: similar requirements for failure-to-file, failure-to-pay, and failure-to-deposit penalties. (irs.gov)
Penalties Covered (and Not Covered)
Areas where AEP prevents penalties:
- Failure-to-file penalties.
- Failure-to-pay penalties.
- Failure-to-deposit (for business taxpayers). (irs.gov)
Excluded payments or returns include infrequent or special ones like: Form 706 (estate tax), Form 709 (gift tax), certain information returns. There are categories that the AEP does not touch. (irs.gov)
Key Dates and Transition
| Action | Begins | Replaces FTA | Full Phase-Out of FTA |
|---|---|---|---|
| AEP applied automatically to eligible original returns for tax year 2025 and quarterly returns in 2026 | Summer 2026 | In-motion now | Effective for returns with original due dates on or after January 1, 2027 (irs.gov) |
During the transition, taxpayers with returns due in 2025 or 2026 may still receive notices as the systems catch up. If you think you qualify but still got a penalty, you may still request FTA relief or raise reasonable cause arguments. (irs.gov)
Practical Implications & Actionable Insights
What Taxpayers Should Do Now:
- Check your filing history. Make sure returns have been filed timely for the past three years, and that payments owed were made or properly arranged.
- Keep an eye on notices. If you receive a penalty notice but believe you meet AEP criteria and didn’t get a corresponding relief notice, respond or call the IRS.
- Avoid assumptions. Even with AEP, interest due or penalties not covered under AEP will still apply.
What Tax Professionals and Businesses Must Adjust:
- Monitor eligibility closely; advice around penalty abatement requests will shift.
- Update client checklists to include AEP eligibility in planning.
- For businesses: understand that failure-to-deposit penalties are now part of the relief umbrella if you qualify.
Conclusion
AEP brings welcome relief for many compliant taxpayers, replacing the administrative burden of requesting penalty forgiveness. If you’ve stayed current on filings and payments, penalties might now be waived automatically. But stay vigilant—knowing the rules, watching for notices, and not ignoring penalties are still essential.