Compliance
How to Leverage the New Automatic Exemption from Penalty: A Compliance Game-Changer
IRS’s introduction of the Automatic Exemption from Penalty (AEP) transforms how many taxpayers manage late filings, payments, and deposits—no more First Time Abate requests.
By NomadicTax Research Team • 5-8 min read • August 9, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
The IRS has officially replaced the longstanding **First Time Abate** relief with a new system—**Automatic Exemption from Penalty**, or **AEP**, announced July 8, 2026. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) Under AEP, taxpayers who have shown a history of filing and paying on time in the three prior years (or 12 consecutive quarterly payments for business returns) *automatically* receive relief from certain penalties instead of having to submit requests for abatement. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Penalties Are Covered & Who Qualifies
AEP covers penalties for:
- Failure to file
- Failure to pay
- Failure to deposit
To qualify, you must have a solid history of compliance. That means:
- Originals returns on time and any tax due fully paid in the three previous years (for annual filings), or
- For quarterly returns, 12 straight quarters of on-time filing/payment. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Note: Some returns are **not eligible** under AEP—like information returns, occasional transactions, Forms 706 and Form 709 (estate, gift/generation-skipping transfer returns). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Effective Dates & What This Means for You
- AEP begins in **summer 2026**, applying to tax year **2025** original returns and **2026** quarterly returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- After **January 1, 2027**, AEP will *replace* First Time Abate for eligible returns with original due dates on or after that date. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Until then, First Time Abate still applies in some cases. If you believe you qualify and didn’t get AEP, you can still request First Time Abate. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Why This Is a Big Deal for Tax Planning & Compliance
- **Less paperwork and hassle.** You no longer have to submit a request—relief comes automatically if qualified. This removes a major barrier.
- **Consistency and equity.** Taxpayers with clean histories are treated fairly and reliably.
- **Focus shifts.** With fewer penalty disputes for eligible returns, more IRS resources can go elsewhere.
## Actionable Takeaways
1. **Audit your filing/payment history.** Confirm you meet the AEP criteria for years/quarters.
2. **Watch your returns now.** For 2025 and 2026 (quarterly), submit on time and ensure payments are complete.
3. **Check notices.** If AEP was applied, you should get a notice. If not, and you qualify, consider requesting First Time Abate while available.
4. **For businesses with quarterly filings**, particularly check the 12-quarter window. Keep detailed documentation.
With AEP, the IRS gives compliance a boost—rewarding history, reducing defensive work, and simplifying administration. Tax professionals and individuals alike should integrate this into their compliance strategies moving forward.