Compliance
How the New Automatic Penalty Relief Changes Your Compliance Risk
The IRS has introduced a new Automatic Exemption from Penalty (AEP) rolling out in summer 2026—here’s how it replaces First Time Abate and what that means if you file and pay on time.
By NomadicTax Research Team • 5-8 min read • July 12, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
The **Automatic Exemption from Penalty**, announced July 8, 2026 in IRS News Release IR-2026-83, is a new program that automatically waives certain penalties for taxpayers with a solid compliance record. If you file and pay your taxes on time for a specified look-back period, the IRS will **automatically** exempt certain penalties — no need to request relief manually.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
This replaces the older **First Time Abate** relief. Beginning in 2027, First Time Abate will be phased out for returns with original due dates on or after January 1, 2027. During 2025 and 2026, there’s a transition window for eligible returns.([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 be eligible, you need a history of timely filing and paying:
- For individual returns: must have filed and paid on time for the **past three years**.
- For quarterly returns: must have filed and paid on time for **12 consecutive quarters**.
- Applies to penalties related to **failure to file**, **failure to pay**, and **failure to deposit** tax liabilities.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Some returns are **not** eligible:
- Information returns, such as Form 706 (Estate Tax Return) or Form 709 (Gift Tax Return), or in cases of specific or infrequent tax events.
- Any penalties or interest charges beyond those three types listed above.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## When Does AEP Become Effective?
- Begins summer **2026** for eligible original returns, including tax years **2025**, quarterly filings in **2025-2026**, and beyond.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- First Time Abate relief will be phased out, with AEP replacing it entirely 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))
## Practical Implications & Examples
Consider two scenarios:
| Situation | Before AEP | With AEP |
|---|---|---|
| You filed and paid on time for 2023-2025, but in 2026 you file 1040 late. | You’d need to request First Time Abate relief manually to have the failure-to-file penalty waived. | Under AEP, no request needed; the waiver is applied automatically if you meet the criteria. |
| A business has missed quarterly deposits in 2026 but met all requirements for previous 12 quarters. | They’d receive penalties and need to appeal individually. | Under AEP, those penalties could be automatically exempted if all qualifying conditions are met. |
## Actionable Advice for Taxpayers & Tax Professionals
- **Review your compliance record**: Make sure your prior returns are filed and paid on time, especially for 2023-2025 or past 12 quarters.
- **Confirm eligibility**: Don’t assume eligibility until officially notified, especially with non-typical returns or tax events.
- **Keep documentation**: Though AEP is automatic, maintain records proving timely filings and payments in prior periods.
- **Phase out period**: Returns due January 1, 2027 or later will depend solely on AEP. If First Time Abate requests need to be made before this cutoff.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Key Takeaway
If you’ve been on point with filings and payments, the IRS is simplifying relief by doing much of the work for you. If you find yourself consistently compliant, AEP could reduce both penalty risks and your administrative burden. But verify your eligibility carefully—some returns and scenarios fall outside the scope.