Compliance
How the IRS’s New Automatic Exemption from Penalty (AEP) Will Simplify Penalties for Compliant U.S. Taxpayers
Starting summer 2026, U.S. taxpayers with strong filing and payment history will benefit from a new system that automatically waives certain penalties—no application needed.
By NomadicTax Research Team • 5-8 min read • July 29, 2026
## What’s Changing: AEP Replaces First Time Abate
The **Automatic Exemption from Penalty (AEP)** is a new IRS policy taking effect in summer 2026, designed to streamline penalty relief for those who consistently meet tax filing and payment obligations on time. It will **replace the First Time Abate administrative relief**, meaning taxpayers no longer need to request relief under that older program. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies?
To be eligible for AEP you must have:
- Filed returns and paid any tax owed **TIMELY** for the past **three consecutive 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))
- Applied it to returns due starting **tax year 2025**, quarterly returns for 2025 and 2026, and later periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Exclusions include **information returns**, estate/gift tax returns, and other filings tied to infrequent or specific events. These are generally not eligible. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Penalties Are Covered
If eligible, the IRS will automatically waive these penalties during processing:
- **Failure to file**
- **Failure to pay**
- **Failure to deposit** required amounts. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Notice of relief will be issued by the IRS confirming the AEP was applied, so no action is needed by the taxpayer. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Important Dates & Transition
| Phase | Time Period | Notes |
|---|---|---|
| AEP begins | Summer 2026 | Applies to qualifying tax year **2025** and future quarterly returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
| Full replacement of First Time Abate | Returns with original due dates **on or after Jan 1, 2027** | After this, First Time Abate will no longer be available. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
## Why This Matters
- **Less Burden**: No need to file formal requests for eligible penalties—relief is automatic.
- **Fairness & Consistency**: Greater equity in how penalty relief is handled across similarly situated taxpayers.
- **Efficiency**: Reduces administrative load both for taxpayers and IRS staff.
## Practical Examples
### Example 1: Individual Taxpayer
- You’ve filed timely and paid tax for **tax years 2022, 2023, and 2024**.
- You file your 2025 return on time, but miss a payment deadline. Under AEP, if qualified, the usual failure-to-pay penalty is **automatically waived**—you only pay tax and interest.
### Example 2: Quarterly Filer (Business)
- Over 12 consecutive quarters (2022–2024), you’ve met both filing and payment deadlines.
- In one quarterly return for 2025, you miss a deposit deadline. That failure-to-deposit penalty is **automatically exempted** if you qualify.
## What You Should Do Now
- Review your filing and payment history for the past 3 years (or 12 quarters) to check eligibility.
- Ensure your 2025 filings meet deadlines.
- If you believe you qualify but still received penalty notices, reach out to the IRS—there may be lag or misapplication.
- For returns not covered (e.g., estate tax, information returns), consider if other relief applies (e.g. reasonable cause).
**Bottom line**: For taxpayers with a clean track record, AEP makes penalty relief easier, fairer, and largely automatic. It’s a big step forward in reducing barriers and recognizing compliance history.