Compliance
How the IRS’s New Automatic Exemption From Penalty (AEP) [Effective 2026–27] Transforms Penalties
Taxpayers with clean histories can now avoid common IRS penalties without having to ask—thanks to the Automatic Exemption from Penalty program replacing First Time Abate.
By NomadicTax Research Team • 5-8 min read • September 14, 2026
## What changed
- In **summer 2026**, IRS introduced a new system called **Automatic Exemption from Penalty (AEP)**. Under AEP, eligible taxpayers no longer need to request First Time Abate relief—the IRS will grant penalty relief automatically. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- AEP applies to **failure to file**, **failure to pay**, and **failure to deposit** penalties for those with a track record of filing and paying on time over the prior three years (or 12 consecutive quarters for quarterly filers). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- First Time Abate will be phased out; AEP takes effect fully for returns with **original due dates on or after January 1, 2027**. For tax years 2025 and certain quarterly returns in 2026, First Time Abate may still apply. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Why this matters for taxpayers and tax professionals
- **Reduced administrative burden**: No need to apply or write requests for First Time Abate if you meet eligibility—relief granted automatically.
- **Predictability and fairness**: Helps ensure consistency across taxpayers with similar compliance history.
- **Still need to watch filing deadlines, payments, and deposit schedules closely**—because not all types of returns are covered (e.g. estate tax returns, gift tax returns, information returns). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who qualifies & who doesn’t
| Eligible if you… | Not eligible if you… |
|-------------------|-------------------------|
| Filed and paid all returns due in the last 3 years (or 12 quarters) | File only in response to infrequent events (Form 709, Form 706, etc.) |
| Did not have large unpaid taxes or recurring underpayments | Had a history of penalties for failures beyond the ones AEP covers |
## Practical Steps Before Jan 1, 2027
1. **Review your past 3 tax years (or 12 quarterly filings)** to ensure you meet timely filing/payment requirements.
2. **If you believe you qualify**, you can still request First Time Abate for tax year 2025 or eligible 2026 quarterly returns—but that request will eventually be replaced with AEP.
3. Make sure your **tax records are accurate and up to date**, especially IRS receipts or proof of payment.
4. Watch for the IRS notification—which the IRS will send when AEP is granted.
## Example of impact
- **Scenario A**: Sarah filed all her individual returns for 2023–2025 on time and paid all she owed. Under AEP, if she misses a payment deadline in a future year, she may avoid a failure-to-pay penalty, even without filing a request.
- **Scenario B**: Bob, who files only Form 709 when making gifts above the exclusion limit, would **not** generally be eligible for AEP for those gift tax returns. He may still use reasonable cause in specific cases.
## Watch-outs & Compliance Tips
- AEP only waives **certain penalties**; it does *not* remove interest or unpaid tax.
- Accuracy of past compliance matters—prior infractions could disqualify you.
- Keep communication with IRS open if you believe you should qualify but haven’t been granted AEP.
> **Bottom line:** For individuals and businesses with good tax histories, AEP makes penalty relief automatic—no more waiting, no more forms—starting Jan 1, 2027. But good compliance 2023–2025 still counts.