Compliance
How the IRS’s New Automatic Penalty Relief Impacts Your Tax Compliance
The IRS is introducing the *Automatic Exemption from Penalty* program, phasing out First Time Abate—this article shows who qualifies, what it means in practice, and critical steps to ensure you benefit.
By NomadicTax Research Team • 5-8 min read • July 16, 2026
## What’s Changing
On July 8, 2026, the IRS announced that taxpayers with a **history of timely filing and paying tax** will now receive penalty relief *automatically*, under the **Automatic Exemption from Penalty (AEP)** program.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) This replaces the older First Time Abate (FTA) process, simplifying compliance and reducing the administrative burden. AEP starts applying to eligible original returns for tax year **2025**, eligible quarterly returns for **2026**, and later tax periods.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies
Eligible taxpayers are those who, for the three prior years (or 12 consecutive quarters for quarterly filers), have filed their returns and paid any tax due **on time**. Under AEP, penalties for **failure to file**, **failure to pay**, and **failure to deposit** will be waived without the taxpayer needing to ask.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
However, there are exclusions: some returns are not eligible—such as **information returns**, or returns tied to **infrequent events or specific transactions**, like Form 706 (Estate Tax) or Form 709 (Gift Tax).([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Transition Timeline
| Period | What Happens |
|--|--|
| Summer 2026 | AEP becomes effective; IRS begins applying it automatically where criteria met. |
| Tax year 2025 & 2026 returns | Eligible taxpayers may still see FTA notices during transition; taxpayers who qualify may still request FTA if needed.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
| On or after **January 1, 2027** | AEP replaces First Time Abate entirely for returns with original due dates. |
## Practical Examples
- **Example 1**: Jane has filed and paid taxes on time for 2022, 2023, 2024. She files her 2025 return late due to a major health issue. Under AEP, the **failure-to-file** penalty would be automatically waived—no action required from Jane. But she would still owe any interest and underlying tax. |
- **Example 2**: Sam, a quarterly filer, met all 12 quarters of filing and payment deadlines. If he misses a quarterly tax deposit, he qualifies under AEP and should expect no failure-to-deposit penalty if criteria are met. |
## What You Should Do Now
- Review your compliance history—for at least the past three years (or past 12 quarters for quarterly filings).
- Continue filing and paying **on time** to remain eligible.
- If you previously benefited from First Time Abate, understand that AEP may replace it soon.
- Maintain strong documentation—while AEP is automatic, having records ready helps resolve any eligibility questions.
## Implications
- **Reduced burden**: no longer needing formal requests for penalty relief in many cases. |
- **Fairness**: taxpayers with clean records will be recognized systematically. |
- **Risk of missing the benefit**: if taxes or filings were missed in prior years, you may not qualify—review past compliance. |
- **Other penalties & interest still apply**: AEP doesn’t eliminate those. |
**In short:** For those who have reliably filed and paid taxes promptly, the Automatic Exemption from Penalty is a welcome simplification. But it’s essential to keep up with your filings and payments to stay in the eligibility zone.