Compliance
How the IRS’s Automatic Penalty Exemption Makes Compliance Easier for Consistent Filers
Discover how the IRS’s new Automatic Exemption from Penalty (AEP) can help taxpayers who have a solid compliance history avoid penalties, without needing to file special requests.
By NomadicTax Research Team • 5-8 min read • September 8, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
In summer 2026, the IRS introduced AEP to provide **automatic penalty relief** for taxpayers who have consistently filed returns on time and paid their taxes in full for the past three years (or 12 quarters for quarterly filers). This replaces the previous First Time Abate system. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
AEP covers penalties related to:
- Failure to file,
- Failure to pay,
- Failure to deposit.
Eligibility applies to original returns filed for tax year 2025 and quarterly returns in 2026 forward, provided the compliance history requirement is met. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Why It Matters Globally
Although this is a U.S. domestic policy, the principle is relevant worldwide for globally mobile individuals, foreign investors, digital nomads, and multinational businesses. Many countries have or will adopt similar regimes—rewarding compliance, easing administrative burdens, and reducing friction where tax jurisdictions overlap.
## Actionable Insights & Practical Examples
- **Review your past compliance history**: Have you filed all returns and paid taxes on time over the past three years (or 12 quarters)? If yes, you may already qualify for AEP.
- **No need to apply**: The relief is applied automatically when qualifying returns are processed. You should receive a notice confirming the relief. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **Historic penalty notices?** If you received a penalty for tax years 2025 or quarterly returns of 2026 and believe you qualified, contact the IRS to correct the record during the transition period. First Time Abate may still apply for qualifying situations. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Illustrative Case
| Taxpayer Type | Compliance Record | AEP Eligibility |
|---|---|---|
| Individual filer, on-time and full payments for 2022–2024 | ✅ | Eligible for AEP for TY 2025 returns |
| Quarterly filer for 2026, timely across prior 12 quarters | ✅ | Penalties on deposits, payments, or filing could be waived under AEP |
| Mixed record (late filing in one past year) | ❌ | Must request relief via reasonable cause or older First Time Abate, where still applicable |
## Lessons for Global Tax Planning
- Keep organized, timely records—especially when moving across countries or jurisdictions.
- For digital nomads or virtual companies, stay current with home country returns even if income is earned elsewhere.
- Use the model from AEP to push for similar schemes in other jurisdictions—many are considering compliance-based relief.
AEP is part of a wider movement towards **modern, fair, and efficiency-oriented tax systems**. Penalty relief is no longer just reactive—it’s becoming a proactive tool of trust-building between tax authorities and taxpayers.