Compliance
How the New AEP Changes Penalty Relief for U.S. Taxpayers
Starting summer 2026, the IRS is implementing the Automatic Exemption from Penalty (AEP) which replaces First Time Abate and changes how failure‐to‐file, pay, or deposit penalties are handled.
By NomadicTax Research Team • 5-8 min read • August 9, 2026
## What is the Automatic Exemption from Penalty (AEP)?
The IRS announced on **July 8, 2026** a new relief program called AEP, intended to simplify penalty relief for taxpayers with a documented history of compliance ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)). This replaces the First Time Abate (FTA) program for eligible returns with original due dates on or after **January 1, 2027** ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
## Eligibility Criteria
To qualify for AEP, taxpayers need to satisfy all of these:
- Three prior years of **timely filing and paying any taxes due** for annual returns, or 12 consecutive quarters of timely compliance for those who file quarterly returns ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
- The return in question must be an **original return** of a common type (e.g., Forms 1040, 1120, 941 etc.) rather than information returns or estate/gift tax returns ([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)
**Covered penalties (automatically relieved if eligible):**
- Failure to file penalties.
- Failure to pay penalties.
- Failure to deposit penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
**Not covered by AEP:**
- Accuracy‐related penalties.
- Penalties related to information returns (e.g., Form 1099‐series), or infrequent returns like Form 706 or Form 709. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
## Transition Timeline
| Period | Relief Option Available |
|---|---|
| Tax Year 2025 & 2026 Quarterly Returns (if processed after start of AEP) | AEP applies automatically for eligible returns; FTA still available if you don’t receive confirmation of AEP or believe you qualify under FTA ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai)) |
| Original due dates on or after Jan 1, 2027 | AEP fully replaces FTA for eligible returns ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
## Practical Example
- If you filed your 2022, 2023, and 2024 returns on time and paid any tax due by the deadlines, and you have reasonable quarterly payment history, then for a late Form 1040 filed in April 2026 for tax year 2025, the IRS will **not assess** failure to file or pay penalties if qualifying under AEP. You don’t need to request it. You’ll receive a notice confirming penalty relief ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai)).
- If a taxpayer files Form 709 (Gift Tax Return), that return is generally **not eligible** for AEP; late penalties on it are handled via other relief options if they exist. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
## What You Should Do Now
- Review your tax history **three years back** (or last 12 quarters) to ensure no missed filings, payments, or deposits.
- If you get a penalty notice but also receive a separate IRS notice stating that AEP was applied, then you're covered; no action needed.
- If you believe you should have benefited from AEP, but penalties were still assessed, you can contact the IRS, possibly invoking FTA or reasonable cause relief during the transition period ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/nta-blog/a-long-awaited-taxpayer-win-the-irs-implements-automatic-penalty-relief/2026/07/?utm_source=openai)).
## Why This Matters
- **Relieves burden**: No longer need to file a formal claim (as with FTA) for many cases.
- **Fairness**: Recognizes compliant taxpayers automatically.
- **Encourages consistent compliance**.
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This change is important for both individuals and businesses. Knowing whether you're eligible can save you money and stress. If in doubt, review your recent filing and payment history and consult a tax professional if needed.