Compliance
How the IRS’s Automatic Exemption from Penalty (AEP) Changes Compliance Strategy
The IRS has introduced AEP, replacing First Time Abate, to automatically relieve penalties for certain taxpayers — this changes how individuals and businesses should plan their filing and payment habits.
By NomadicTax Research Team • 5-8 min read • July 25, 2026
## 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## 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](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- 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.
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**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.