What is the Automatic Exemption from Penalty (AEP)?
The IRS announced on July 8, 2026, a new program called Automatic Exemption from Penalty (AEP). It will replace the First Time Abate relief program for eligible original returns beginning with tax year 2025 and the 2026 quarterly returns. (irs.gov)
Under AEP, taxpayers with a solid compliance history—meaning filing and paying on time in the previous three years (or 12 consecutive quarters for those filing quarterly)—will automatically avoid penalties for:
- Failure to file on time
- Failure to pay on time
- Failure to deposit required amounts like payroll taxes (irs.gov)
Important: AEP doesn’t require any action from eligible taxpayers. If the IRS determines you qualify, they’ll apply the relief and send a notice confirming this. Returns aren’t immediately eligible? You may still request penalty relief through the “reasonable cause” process. (irs.gov)
Why This Matters: Strategic Shifts in Compliance
1. Filing and Payment Consistency Becomes More Valuable
- The previous First Time Abate required qualifying taxpayers to request relief. AEP rewards continuous compliance without extra effort.
- Businesses and individuals should aim for zero missed filing deadlines and tax payments across at least three tax years or 12 consecutive quarters.
2. Calendar Watch for Eligibility
- AEP applies to returns filed for tax year 2025 and quarterly returns in 2026, as well as returns following those periods. (irs.gov)
- If you miss one qualifying period, losing eligibility for AEP means you may face penalties unless you show reasonable cause.
3. Use the Reasonable Cause Exception Smartly
- If caught off guard—say due to a software glitch, illness, or natural disaster—document the issue thoroughly.
- File Form 843 for abatement or refund of penalties pertaining to failure to pay or file, as needed.
4. Keep More Compliance Records
- Maintain records showing payments, filings, due dates, etc.
- Clear documentation aids in case you're ineligible for AEP and need to demonstrate reasonable cause.
Practical Example Scenarios
| Scenario | Outcome Under AEP |
|---|---|
| Sarah filed all returns and paid on time for 2022–2024, but in 2025 forgot to make a quarterly estimated tax payment. | Not eligible for AEP for 2025 return (loss of timely compliance requirement), but can request relief via reasonable cause. |
| A consulting firm with clean filings and tax payments for the past 3 years misses a Form 941 deposit due date in Q1 2026. | Because they met eligibility in the prior 12 quarters, AEP should apply automatically and relieve that penalty. |
Action Steps to Take Now
- Check your filing and payment history: Do you meet the 3-year/12-quarter on-time standard?
- If you're close, avoid delaying or missing upcoming deadlines to preserve eligibility.
- Even if you aren’t currently eligible, plan for the future.
- If you get a penalty, assess if “reasonable cause” relief might help, and speak with a tax professional if needed.
In short: AEP simplifies relief for penalty-prone but otherwise reliable taxpayers. The new standard shifts emphasis toward maintaining consistent compliance over time rather than hoping for single relief events.