Compliance
How the New Automatic Exemption from Penalty (AEP) Transforms Penalty Relief in US Taxes
A fresh IRS policy introduces the Automatic Exemption from Penalty (AEP), phasing out First Time Abate — here’s how it works, who qualifies, and tactics to use it to your advantage.
By NomadicTax Research Team • 5-8 min read • July 18, 2026
## What’s Changing: AEP Replaces First Time Abate
Starting summer 2026, the IRS is introducing the **Automatic Exemption from Penalty (AEP)** — a sweeping change intended to simplify penalty relief. It replaces the existing First Time Abate (FTA), meaning taxpayers who qualify will no longer need to file requests. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies for AEP?
To access AEP, you must meet both criteria:
- A history of **timely filing** and **paying due taxes** for the prior **three years** (or twelve consecutive quarters for quarterly filers).
- Be filing **original returns** for tax years **2025 and 2026**, and going forward.
Some important exclusions:
- **Information returns** (e.g. Forms 1099 etc.)
- Returns filed due to *infrequent events* such as Form 706 (Estate tax) or 709 (Gift tax) are generally **not eligible**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Which Penalties AEP Relieves Automatically
If eligible, AEP means the IRS **will not assess these penalties on eligible returns**:
- Failure to file on time
- Failure to pay on time
- Failure to deposit tax obligations (for those needing to deposit)
However, it’s key to note that **tax and interest due are still owed**. Penalties **not covered** by the relief or those arising outside the scope (e.g. fraud penalties) will still apply. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Happens to First Time Abate?
FTA will be **phased out over summer 2026**. Taxpayers who qualify for FTA may still receive penalties in some cases, especially for 2025 and 2026 quarterly returns if filing or paying late. After Jan. 1, 2027, AEP will fully replace FTA for all eligible returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical Tips to Maximize Benefit
- **Check your timely filing/payment history** for the last three years. If you've had clean compliance, you're likely eligible.
- **File early** and ensure all tax payments are submitted with the return. Don’t wait until deadlines approach.
- **Save documentation** proving on-time filing and payment — it may help if IRS needs confirmation.
- **If you believe you qualify for FTA** before AEP begins, contact the IRS to request FTA; otherwise AEP will handle eligible cases automatically.
- **Be aware of exclusions** if your return type isn’t eligible — such as estate/gift returns, or ones triggered by specific transactions.
## Why This Matters
- **Reduced burden**: Eliminates the need to fill out FTA forms and make formal requests.
- **Consistency**: Applies the same rules uniformly instead of discretionary relief under FTA.
- **Incentive for compliance**: Rewards taxpayers who are consistent with filing and payments.
## Example Scenarios
| Scenario | Qualifies? | Outcome |
|---|---|---|
| You filed returns and paid taxes from 2022 through 2024 on time; owing for 2025 late penalty for failing to file on time. | Yes | Under AEP, the late-filing penalty will be **automatically waived** without request. |
| Quarterly business filers with 12 straight quarters of timely payments and filings, but miss one deposit. | Yes (if no other disqualifying event) | The failure-to-deposit penalty should be waived under AEP. |
| You filed Form 709 (Gift Tax Return) or Form 706 (Estate Tax Return). | No | AEP doesn’t apply; need to rely on other relief methods. |
## Action Steps Right Now
1. Review your **filing and payment history** for the last three years or twelve quarters.
2. Make sure all future returns are filed on original due dates wherever possible.
3. Keep organized records of everything — notices, payments, filing confirmations.
4. Monitor IRS announcements for exact dates when AEP becomes effective, and for guidance on excluded penalties.
This automatic process streamlines relief, ensures fairness, and encourages timely compliance — a big win for many taxpayers. Leverage your clean compliance history to your advantage this filing season.