Compliance
How the New Automatic Penalty Relief (AEP) Simplifies Compliance for U.S. Citizens in Puerto Rico
The IRS’ new Automatic Exemption from Penalty program removes a key roadblock by granting relief without requiring taxpayers to request it — here’s how residents of Puerto Rico can take advantage.
By NomadicTax Research Team • 5-8 min read • September 9, 2026
## What’s Changing: Automatic Penalty Relief
The IRS introduced the *Automatic Exemption from Penalty (AEP)* in **July 2026**, replacing the older *First Time Abate* relief program. AEP applies automatically to eligible filings for **tax years 2025 and 2026** (and beyond) for those who've met certain compliance criteria. Under AEP, penalties for the following are not assessed: failure to file, failure to pay, and failure to deposit. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Why This Matters for Bona Fide Residents of Puerto Rico
Puerto Rico residents play by distinct tax rules: income from Puerto Rican sources is generally exempt from U.S. federal income tax if you're a bona fide resident the entire tax year, and you file your Puerto Rican tax return on worldwide income. However, you still file a U.S. return — the exempt Puerto Rican source income is excluded. The AEP can alleviate penalties unrelated directly to Puerto Rican-source income, especially for quarterly or annual U.S. filings when required. ([irs.gov](https://www.irs.gov/publications/p54?utm_source=openai))
## Eligibility: Do You Qualify?
To benefit from AEP:
- You must have filed and paid all required returns **on time** for the past **three years** (or for quarterly returns: 12 consecutive quarters). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- The relief applies to original returns, including quarterly ones, for years 2025 onward. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- It **does not** apply to certain information returns (e.g., Form 709 gift tax, Form 706 estate tax returns) or filings prompted by special one-off transactions. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Actionable Advice: What to Do Next
- **Self-check your filing history.** Confirm that you have a clean record over the last three years or 12 quarters; if not, consider correcting past filings where possible.
- **Review U.S. vs. Puerto Rico tax obligations.** Ensure Puerto Rico-source income, employment tax withholding, and resident status align correctly in both Puerto Rico and U.S. systems. Consider for example: wages from a U.S. federal agency in Puerto Rico may be taxed differently. ([irs.gov](https://www.irs.gov/government-entities/federal-state-local-governments/information-for-governmental-entities-in-us-territories?utm_source=openai))
- **Take advantage of other recent changes**: The IRS has also made post-publication updates to forms such as W-2VI, W-2AS, and W-2GU, which affect Puerto Rico-related reporting. Make sure to use the most current versions. ([irs.gov](https://www.irs.gov/forms-pubs/changes-to-current-forms-publications?utm_source=openai))
- **Consult a tax professional** experienced in Puerto Rico tax law to avoid surprises, especially if you have mixed-source income or dual obligations.
## Example Scenario
Maria is a U.S. citizen and bona fide resident of Puerto Rico for tax year 2026. She correctly files her Puerto Rican return with all income and her U.S. return excluding Puerto Rico income. She has filed timely returns and paid taxes (if any owed) for 2023-2025. In early 2027, she misses the deadline on her U.S quarterly report. Under AEP, no failure-to-file penalty is assessed — provided she meets the clean history requirement. Previously she would have had to apply under First Time Abate; now relief is automatic.
## Bottom Line
The AEP simplifies compliance for many in Puerto Rico by eliminating the burden of formally requesting penalty relief when you've maintained a good compliance record. Pair this with current reporting responsibilities and updated forms and you’ll minimize penalties and streamline both U.S. and Puerto Rico tax obligations. If you are unsure about your filing history or what documentation is required, it’s wise to seek professional guidance now.