Compliance
How to Navigate the New Automatic Exemption from Penalty (AEP): Simplifying Penalty Relief
AEP replaces First Time Abate and automatically shields taxpayers with good filing and payment history from certain penalties—no action required in most cases.
By NomadicTax Research Team • 6 min read • August 28, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
AEP is a new IRS system starting in **summer 2026** that provides **automatic relief** from select penalties for taxpayers who have a solid compliance track record. It will replace the First Time Abate program for returns with 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))
Under AEP, taxpayers don’t need to request relief if they meet eligibility standards—it’s automatic. You’ll receive a notice confirming that penalties were not assessed. ([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai))
## Who Qualifies for AEP?
To be eligible, individuals must have:
- Filed required returns and paid any tax due, **on time, for the prior 3 years**; or
- For quarterly filers: a history of **12 consecutive timely quarters**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Businesses have similar criteria. Both must avoid prior significant penalty exposure. Returns like gift tax (Form 709) or estate tax (Form 706) are generally excluded. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Penalties Are Covered
AEP will prevent assessment of the following for eligible taxpayers/returns (once eligible):
| Type | Individuals | Businesses |
|------|-------------|------------|
| Failure-to-file penalties | ✓ | ✓ |
| Failure-to-pay penalties | ✓ | ✓ |
| Failure-to-deposit penalties | ✗ | ✓ |
(It does not eliminate the tax itself, interest, or other unrelated penalties.) ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
## Transition and Timing: What You Should Know
- AEP is being phased in during **summer 2026**, and **original returns** beginning with tax year **2025** and **2026 quarterly** returns are covered. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- FTA continues during the transition period for certain returns; if you think you qualify but didn't receive AEP, you can still request relief the old way. ([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai))
- Note: the due dates of returns matter. For example, returns due in **2026 or later** may be covered, depending on when they were filed.
## Tips & Action Steps
- **Check your filing/payment history**: if you filed on time and paid in full for the last 3 years (or four quarters, if applicable), AEP likely applies to you.
- **Retain documentation**: bank statements, IRS notices, proof of timely knowledge—helpful if exceptions apply and you request relief manually.
- **Watch notices**: IRS will send notice when AEP was granted (“Penalty was not assessed because your filing history qualifies…” type). If you receive a penalty notice without AEP language, review whether the notice is in error.
- **Consult tax professionals** if your situation is complex—especially for business taxpayers or those with state-paid family leave issues or unusual reporting circumstances.
## Real-World Example
**Example 1 – Individual**: Jane has filed all her 2022, 2023, and 2024 returns on time and fully paid her taxes. Auto-deposited for the 2026 first quarter estimated taxes. She accidentally files her 2025 return a week late. Under AEP, assuming eligibility, Jane would not be penalized for failure to file or failure to pay the late return if it otherwise meets the eligibility criteria.
**Example 2 – Business**: Acme LLC has submitted all 2025 quarterly returns on schedule, paid deposits timely, and has no past major penalties. For 2026 Q2, it misses a deposit deadline. Since failure-to-deposit is covered for businesses under AEP, Acme may avoid that penalty if it qualifies.
## Summary
AEP represents a major simplification of penalty relief for IRS taxpayers, recognizing those who consistently file and pay on time. It removes friction—no need to ask for relief in many cases. If you meet eligibility criteria, watch for IRS notices confirming penalty relief. If you don’t but qualify, First Time Abate or reasonable cause relief may still apply.
**Category**: Compliance