Compliance
IRS Introduces Automatic Penalty Relief: Your New Option to Avoid Penalties
IRS is phasing out First Time Abate and launching Automatic Exemption from Penalty (AEP) in summer 2026 for compliant taxpayers—learn eligibility, timeline, and steps.
By NomadicTax Research Team • 5-8 min read • August 27, 2026
## What is the Automatic Exemption from Penalty (AEP)?
The AEP is a newly announced IRS program designed to provide **automatic penalty relief** for taxpayers who consistently file returns and pay taxes on time. This replaces the traditional **First Time Abate** relief option. Unlike First Time Abate, AEP does not require a taxpayer to submit a request if eligible—it’s applied automatically during processing.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies & Which Penalties Are Covered
### Qualification Criteria:
- Must have a **history of timely filing returns and paying taxes over the past three years**, or **12 consecutive quarters** for quarterly returns.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Applies to **original returns filed beginning with tax year 2025**, **2026 quarterly returns**, and future tax periods.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Covered Penalties:
- Failure to file penalty
- Failure to pay penalty
- Failure to deposit penalty
If AEP applies, these penalties won’t be assessed. However, taxpayers must still pay all taxes and interest due, and penalties not covered by AEP remain applicable.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Timeline: When It Starts & When First Time Abate Ends
- AEP became effective in **summer 2026**.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **First Time Abate** will be phased out and replaced by AEP for returns with original due dates **on or after January 1, 2027**. During the transition, First Time Abate may still be available for qualifying 2025 and 2026 returns.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical Examples
| Situation | Outcome under AEP |
|---|---|
| You filed tax returns and made all payments on time in 2022-2024; in 2025 you missed an estimated tax payment deadline | For your 2026 quarterly returns, assuming earlier compliance, you won’t be assessed the failure to deposit penalty **if qualified under AEP**. |
| You’re a new business with no three-year history | Won’t qualify yet for AEP; may still request First Time Abate if eligible during the transition. |
## What You Should Do Now
- Check your compliance history. If you missed any filings or payments in the three prior years, you may not qualify yet but can aim for eligibility.
- Keep documentation proving timely filings, payments, and deposits.
- When you receive IRS communications, watch for new notices confirming that you were granted AEP. ℹ️ The IRS will issue a notice when relief is granted.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Don’t assume First Time Abate applies if your due date falls in 2027 or later—begin evaluating under AEP criteria.
## Implications & Caveats
- AEP does **not apply** to information returns or returns filed in response to special events (like gift tax returns, estate returns) in many cases.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Penalties related to deposits, wages, or excise taxes may still apply if they fall outside the scope of original returns or eligible periods.
- Being eligible doesn’t mean penalties **automatically disappear**—tax owed and interest still must be handled.
## Conclusion
The shift to AEP reflects IRS efforts to streamline relief, increase fairness, and reduce administrative burden. For taxpayers with a clean track record, this is welcome good news—just be sure to confirm eligibility and act accordingly as 2026 progresses toward the sunset of First Time Abate. With preparation, you can stay compliant and minimize penalties without extra paperwork.