Compliance
How the IRS’s New Automatic Exemption from Penalty Can Simplify Your Tax Compliance
A recent IRS reform introduces a hands-free penalty relief mechanism for taxpayers with strong prior compliance—no more formal requests needed if you qualify.
By NomadicTax Research Team • 5-8 min read • July 23, 2026
## What’s Changing: From First Time Abate to Automatic Exemption from Penalty
The IRS has replaced the **First Time Abate** (FTA) program with a streamlined system called the **Automatic Exemption from Penalty (AEP)** as of summer 2026. Eligible taxpayers will now receive penalty relief automatically—no forms, no requests needed. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Who Qualifies
You may be eligible for AEP if you meet these criteria:
- For individual returns, you have a history of filing and paying on time over the past **three years**.
- For quarterly business returns, consistent compliance over **12 consecutive quarters**.
- Applies to original returns for tax years **2025 and 2026** and future periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### What Penalties AEP Covers—and What It Doesn’t
Relief applies automatically to:
- Failure to file
- Failure to pay
- Failure to deposit (when deposits are due)
But note: returning **information returns** (e.g., estate or gift tax forms) or **transactions triggered by rare or infrequent events** may be excluded. Also, penalties not listed in these categories aren’t eligible under AEP. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Why This Matters For Compliance
**1. Reduce paperwork and third-party help.** No need to submit a request or gather extra documents if you already meet the compliance history. Saves time and stress.
**2. Predictable tax outcome.** Instead of wondering whether your penalty relief request will be accepted, you’ll know in advance if you qualify.
**3. Maintain compliance standing.** Since the system rewards prior compliance, keeping up with filings and payments is more important than ever. Future penalties may be tougher if patterns of late or missed payments emerge.
## What You Should Do Now
- Review your filing history: Were returns filed on time? Did you pay taxes and deposits by due dates?
- If you believe you're eligible but still received a notice, don’t panic—you may still get FTA during the transition, especially for eligible 2025–26 returns.
- Continue keeping good records. Even though AEP reduces the paperwork for relief, robust documentation helps if any question arises.
- Get professional advice if unsure. The details (especially for businesses with complex returns or income stream changes) can be tricky.
## Real-World Example
Sarah runs a small e-commerce business. She’s filed all quarterly returns and made required deposits on time in the past three years. In Q2 2026, she missed a filing deadline by a few days. Under AEP, that delay would **not** trigger failure to file penalty if she meets eligibility—she doesn't need to ask for relief. Under the old FTA regime, she would’ve needed to file a request and explain.
**Bottom line:** if you’ve kept up your filings and payments, the IRS’s new policy removes a big barrier—no more reactive applications. Ask yourself: does my past track record reflect timely compliance? If yes—you're likely already protected.