Compliance
Inside IRS’s New Automatic Exemption from Penalty (AEP): What It Means for Taxpayers
IRS replaces First Time Abate with AEP for returns with strong compliance histories — find out if you qualify and how this could immediately lower your risk and stress.
By NomadicTax Research Team • 5-8 min read • September 1, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
The AEP is a recent initiative by the IRS to **automatically provide penalty relief** to taxpayers who have demonstrated a history of timely filing and paying taxes. This program **begins summer 2026**, replacing First Time Abate (FTA) for many cases.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) Aimed at relieving the administrative burden on compliant taxpayers, AEP means that for eligible filings, no action will be required to get relief. The IRS will stop assessing penalties like failure-to-file, failure-to-pay, and failure-to-deposit when criteria are met.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Eligibility Criteria for AEP
| Type of Return | Requirement |
|---------------|-------------|
| **Original returns** (for tax year 2025 and beyond) | You must have filed all required returns and paid all taxes owed on time for the **three prior tax years**.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
| **Quarterly returns** (businesses, self-employed) | You need timely filing and payment for **12 consecutive quarters** preceding the one for which penalty relief is sought.([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai)) |
| **Return types** | Some return and penalty types are **not eligible**, e.g., Forms 706 (estate tax) or 709 (gift tax), or infrequent transactions.([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai)) |
## Penalties Covered & Transition Period
- AEP covers **failure-to-file**, **failure-to-pay**, and **failure-to-deposit** penalties for eligible returns.([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai))
- As AEP rolls out, FTA remains available for some taxpayers in transition (especially those filing late returns or using extensions) until **returns with due dates on or after January 1, 2027** are fully under AEP.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical Examples
- **Individual scenario:** Emma filed her returns for 2022-2024 on time and fully paid taxes each year. When she files 2025’s return with all due taxes paid, she should qualify automatically for AEP relief from penalties such as late-file or late-pay. No need to request relief.
- **Business scenario:** Logan’s online store files quarterly estimated tax returns. He also has filed and paid timely for the last 12 quarters. For 2026 Q2, if there's a minor delay in deposit, the business might avoid failure-to-deposit penalty via AEP — provided all other criteria are met.
## What Taxpayers Need to Do (or Not Do)
- **What you don’t need to do:** There’s no request, no written statement, no phone call required to get relief if you meet eligibility. IRS will apply AEP automatically and send a **confirmation notice**.([irs.gov](https://www.irs.gov/newsroom/irs-introduces-new-automatic-penalty-relief-process?utm_source=openai))
- **What to audit/Document:** Keep proof of timely filings and tax payments for past years. Ensure all returns due are filed even if no tax is owed; ensure correct payments are made on time. Missed filings or partial payments may disqualify you.
- **Not eligible?** If you fail eligibility, you can still request relief via **reasonable cause**, or possibly via FTA during transition period.
## Connection to FBAR, FEIE, Other International Rules
AEP does **not directly cover penalties** tied to foreign reporting obligations (FBAR/Form 8938, FATCA) unless they overlap with failure-to-file/tax/pay on income returns for which you otherwise meet eligibility. International taxpayers should still maintain foreign bank account reporting, even when no tax is due. Also, the **foreign earned income exclusion (FEIE)** remains in place and **indexed for inflation** — for tax year 2026 it is **$132,900**, up from **$130,000** in tax year 2025.([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
## Take-Away & Timing
- If you've been compliant in recent years, AEP could **save you stress, time, and money** starting with your 2025 individual returns and 2026 quarterly ones.
- If you have international income, you may combine FEIE or housing exclusions with compliance history to avoid overlapping penalties.
- Keep a documented history of all compliance, file even when income is minimal if required, and avoid leaving gaps.
**Conclusion:** AEP represents a win for conscientious taxpayers. If you meet its criteria, the IRS wants to reward you with automatic relief — no more routine requests for forgiveness. It's a change worth understanding and planning around.