Compliance
How the New Automatic Exemption from Penalty (AEP) Changes Penalty Relief
IRS launches AEP to make penalty relief automatic for compliant taxpayers, replacing First Time Abate.
By NomadicTax Research Team • 5-8 min read • September 3, 2026
## What is Automatic Exemption from Penalty (AEP)?
- AEP is a **new IRS system** initiated in summer 2026 that automatically extends penalty relief to taxpayers who have consistently filed on time and paid taxes due. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- It replaces the *First Time Abate* (FTA) program for original returns due 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))
## Who qualifies
- Individuals who filed and paid on time for the **prior three years**. For quarterly filers, that's timely compliance for **12 consecutive quarters**. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
- Returns by taxpayers without a strong compliance history aren’t eligible. Some forms—such as Form 706 (Estate Tax Return) and Form 709 (Gift Tax Return)—are generally excluded. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
## What penalties are covered
- **Eligible individual taxpayers**: failure-to-file and failure-to-pay penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **Eligible business taxpayers**: adds failure-to-deposit penalties to the list. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- *Note*: Relief only on penalties—not on interest, underlying taxes, or non-covered penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical steps & tips
- **Do nothing**, if you already have a clean record. The IRS will identify you and apply AEP automatically. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- If you're uncertain about eligibility, check payments and filings for past years.
- If you don’t qualify, you can still request relief under **reasonable cause** rules. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
## Example
Jane filed her Form 1040 & paid all taxes on time for tax years **2022–2024**. Her 2025 return is processed correctly, and she meets availability rules. Under AEP, **no failure-to-file or failure-to-pay penalties** will be assessed for 2025—no action needed.
## Implications & takeaways
- Great relief for compliant taxpayers: less worry about losing coverage under FTA or needing to ask for remediation.
- Reduces the burden on IRS and taxpayers: fewer manual requests, more fairness.
- Keep records clean: any misses in filing or payment can disqualify you for this relief period.
## Actionable checklist
- Review your filings/payments for last 3 full years (or 12 quarters).
- Make sure there are no missing returns or late payments.
- Maintain good record-keeping and promptly pay tax liabilities.
- If you know you're disqualified but believe you have reasonable cause, prepare documentation for that request.
AEP offers a simpler, fairer way to shield compliant taxpayers from certain penalties. It’s a change worth knowing about—especially if you’ve already done your tax homework.