Compliance
How the IRS’s New Automatic Exemption from Penalty (AEP) Can Help Your Small Business Avoid Fines
AEP replaces First-Time Abate starting summer 2026—if you’ve been keeping your tax filings and payments in order, you may no longer need to request penalty relief.
By NomadicTax Research Team • 5-8 min read • July 23, 2026
## What is AEP and why it matters
The **Automatic Exemption from Penalty (AEP)** is an administrative change the IRS will begin implementing in *summer 2026*. It replaces the First Time Abate (FTA) policy. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) Under AEP, eligible taxpayers with consistent compliance—filing and paying on time for the past three years (or 12 consecutive quarters for quarterly returns)—won’t have to request penalty relief for certain penalties because they will be automatically exempt. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Which penalties are covered, and which are not
**Penalties you won’t face (if eligible):**
- Failure to file on time
- Failure to pay on time
- Failure to deposit on time ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
**Not covered / exceptions:**
- Information returns, or those filed only due to an infrequent event (like Form 706 or Form 709) are excluded. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Other penalties or interest not explicitly listed
- Filers without the required 3-year or 12-quarter clean record
## Timeline and transition from FTA
| Period | Relief program in effect |
|--------|--------------------------|
| Summer 2026 | AEP begins for returns with due dates during 2025 tax year and quarterly returns in 2026 and all returns thereafter. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
| January 1, 2027 onward | AEP replaces FTA fully for eligible returns with original due dates on or after this date. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
## How to qualify and what you need to do
**Eligibility checklist:**
- A clean filing and payment record in the last **three tax years**, or
- For quarterly return filers, timely filings and payments for the past **12 consecutive quarters**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Return types: Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, CT-1. Exclusions apply. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?campaign=home&redirect_count=1&redirect_id=8a0ae530-a817-4298-b4d6-10e444c289d8&utm_source=openai))
**What you must do:**
- **Nothing**. If you meet eligibility, AEP is applied automatically when your return completes processing. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Keep up your compliance record—filing and paying on time is key
- If you receive a notice showing a penalty nonetheless but believe you qualified for AEP, contact the IRS. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical examples
**Scenario 1: Individual filer**
Sarah has filed her Form 1040 returns on time for 2022, 2023, and 2024. She also paid all tax due by the due date. In 2026, she files her 2025 return late, but meets all other criteria. Under AEP, **no failure-to-file or failure-to-pay penalties** will be assessed. Previously, she would have needed to request FTA.
**Scenario 2: Quarterly filer**
Joe owns a small business and files Form 941 every quarter. For the past 12 consecutive quarters, he filed and paid on time. Q2 2026 deposit deadline arrives, but payment is delayed. Provided he meets the record requirements, AEP means the **failure-to-deposit penalty** will be automatically waived once the return is processed.
## Why this change matters
- **Reduces administrative burden**: No requests, fewer forms, less waiting.
- **More fairness**: Those who maintain good compliance are rewarded automatically.
- **Better planning**: Businesses can forecast lower risk of penalties if they stay compliant.
✅ Actionable insights:
- Review your filing history now—ensure no missed deadlines in past 3 years or 12 quarters.
- Document everything: payments, filings, returns—IRS may verify eligibility.
- Update bookkeeping systems and calendar to avoid future lapses.
- If unsure about eligibility, consult a tax professional or IRS guidance resources.
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This article was written by the NomadicTax Research Team under the US tax rules as of July 2026. Stay aware—rules continue to evolve!