Compliance
How the New Automatic Exemption from Penalty (AEP) Transforms Penalty Relief
A game-changer for compliant taxpayers: the IRS is replacing First Time Abate with an automatic process to eliminate certain penalties for those who’ve consistently filed and paid on time.
By NomadicTax Research Team • 5-8 min read • July 14, 2026
## What is the Automatic Exemption from Penalty (AEP)?
In July 2026, the IRS announced **IR-2026-83**, introducing the **Automatic Exemption from Penalty (AEP)**. This marks a shift away from the manual *First Time Abate* program toward a system that grants penalty relief automatically — no request required — for taxpayers with a recent history of compliance. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who qualifies?
To be eligible for AEP, taxpayers must meet all of the following criteria:
- Timely filed returns and paid any tax due for the **three prior years** (or **12 consecutive quarters** for quarterly filers). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Include applicable return types, such as Forms 1040, 1065, 1120; employment tax forms like 940, 941, etc. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- Failures covered under AEP include **failure to file**, **failure to pay**, and **failure to make required tax deposits**. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
AEP becomes effective starting in **summer 2026**, applying first to original returns for tax year 2025, 2026 quarterly returns, and all future eligible returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Comparison: AEP vs First Time Abate
| Feature | First Time Abate (FTA) | Automatic Exemption from Penalty (AEP) |
|---------|--------------------------|------------------------------------------|
| Requires taxpayer to request relief | Yes | No (automatic for eligible taxpayers) ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))|
| Types of penalties covered | Similar — failure to file/pay/deposit | Same types, plus broader automatic coverage under AEP ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))|
| Starting period of effect | Longstanding, applies via requests | Returns with original due dates **on or after** January 1, 2027 for most forms; relief begins earlier for 2025/2026 returns/quarters ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))|
## Practical Examples
- **Example 1: Individual taxpayer** — Jane has filed and paid all her Form 1040 returns on time for the past three years. She misses the deadline for her 2025 return. Under AEP, she won’t get a failure to file or failure to pay penalty, and she doesn’t need to ask for relief. She’ll receive a notice confirming AEP was applied.
- **Example 2: Small business** — ABC, Inc., with quarterly returns (/forms 941) timely filed/deposited over the past 12 quarters, has a late deposit in a 2026 quarter. AEP would prevent the failure-to-deposit penalty from being assessed for that quarter.
- **Example 3: Non-eligible scenario** — Michael files his tax return very occasionally (e.g., Form 706 for estate tax), which do not recur annually. Those forms are **not** eligible for AEP relief. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Actionable Steps for Taxpayers and Professionals
1. **Review your compliance history.** Ensure you’ve filed and paid on time for the past three years. You’ll need that clean slate to benefit from AEP.
2. **Monitor notices.** Even if relief is automatic, the IRS will send a notice confirming AEP was applied — ensure you keep that in your records.
3. **For non-eligible returns or taxpayers** don’t assume blanket relief — you may still need to request relief or provide reasonable cause.
4. **Avoid reliance on FTA after 2027.** As AEP rolls out fully in 2026 and into 2027, First Time Abate will no longer be effective for new eligible returns after Jan. 1, 2027. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Why this matters (Compliance Category)
AEP reduces taxpayer burden, streamlines IRS operations, and promotes fairness by recognizing those who have otherwise played by the rules. For tax professionals, understanding AEP is critical — it changes how you advise clients about late filings or payments, making certain penalties a non-issue for those who qualify.