Compliance
How the IRS’s New Automatic Penalty Relief (AEP) Changes the Game for Late Filers
The IRS’s shift from First Time Abate to Automatic Exemption from Penalty starting in Summer 2026 means many taxpayers may avoid penalties automatically—no requests required.
By NomadicTax Research Team • 5-8 min read • July 22, 2026
## What’s New: AEP vs. FTA
Starting **summer 2026**, the IRS is replacing its manual First Time Abate (FTA) process with a new **Automatic Exemption from Penalty (AEP)** program. Under the existing FTA system, eligible taxpayers could avoid certain penalties—but only if they proactively requested relief. AEP changes that dynamic, applying relief **automatically** for those who meet the eligibility requirements. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
## Key Eligibility Criteria
To qualify for AEP, you must have a clean compliance record:
- Timely filed required returns and paid due taxes for the **past three years** (or **12 consecutive quarters** for quarterly filings). ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- No penalties (other than estimated tax penalties) assessed—or if they were, they were later abated. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- Businesses specifically: must have avoided having failure-to-deposit penalties 4+ times in past three years and avoid assessment for Electronic Federal Tax Payment System avoidance. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
## Which Penalties AEP Covers
Eligible penalties that AEP will automatically shield you from include:
| Taxpayer Type | Covered Penalties |
| ------------- | ------------------ |
| **Individuals** | Failure-to-File, Failure-to-Pay |
| **Businesses** | Failure-to-File, Failure-to-Pay, Failure-to-Deposit |
You don’t need to request it; once your original return processes, the IRS will issue a notice showing that penalty assessments were not applied due to AEP. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
## What It Means for You
- If you’ve consistently filed and paid on time, you won’t need to scramble for a letter or request to avoid penalties. ✅
- For those just missing deadlines: even though AEP prevents some penalties, interest on unpaid amounts may still accrue. Pay taxes owed to minimize additional cost.
## Sample Scenarios: Before vs. With AEP
1. **Late individual income tax return**: An individual with three prior years of clean filings, who files the 2025 return late in early 2027. Under AEP, **no failure-to-file or failure-to-pay penalty** is imposed—provided taxes are ultimately paid.
2. **Business missing deposit deadlines**: A small business with 12 consecutive quarterly deposits accurate and timely, but misses a single payroll tax deposit due. AEP covers failure-to-deposit penalties for that period.
3. **Non-qualifying case**: A taxpayer with a past penalty that was **not abated** doesn’t meet the clean history requirement, and must still request relief manually under reasonable cause rules or via FTA (if still available).
## Practical Takeaways & Action Plan
- Review your last **three years’ filings** to ensure compliance—late filings or unpaid taxes may disqualify you.
- Always pay as much of your tax owed as possible, even if filing late, to reduce interest accrual.
- Keep good records in case IRS questions your eligibility.
- If you receive a notice that penalties were assessed but believe you qualify for AEP, contact the IRS using the number on your notice.
AEP represents a significant modernization: it rewards consistency, simplifies compliance, and removes many of the hoops taxpayers had to jump through under the old FTA system. Start checking your eligibility now so you can benefit when filing 2025 and beyond.