Compliance
IRS’s Automatic Exemption from Penalty: What Global Taxpayers Should Know
The U.S. IRS has moved from First Time Abate to a more sweeping system that auto-waives penalties for compliant taxpayers—even when filing international forms—if you’ve kept your history clean.
By NomadicTax Research Team • 5-8 min read • August 31, 2026
## What is the Automatic Exemption from Penalty (AEP)?
The **Automatic Exemption from Penalty (AEP)** is a new IRS program announced in **July 2026**, replacing the First Time Abate relief. Under AEP, eligible taxpayers with a history of timely filing and payment will **automatically receive relief** from certain penalties without needing to request it. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Which Penalties & Returns Qualify
AEP applies to:
- **Failure to file**, **failure to pay**, and **failure to deposit** penalties on eligible original returns (e.g., U.S. federal income tax returns) for **tax year 2025** and **2026 quarterly returns**, and future periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Eligible taxpayers must have a history of **filing and paying on time** for the prior three years (or 12 consecutive quarters for quarterly filers). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Note: Some return types are **not eligible**, e.g. certain forms submitted due to special transactions (estate/gift returns, infrequent event returns) and information returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Significance for International Filers & Compliance
- Global tax professionals often deal with treaty-benefits, foreign bank accounts (FBAR), foreign earned income (Form 2555), or foreign tax credits. While AEP focuses on filing/pay/payment obligations, foreign related documentation delays can sometimes lead to filing late. Under AEP, an eligible filer **may avoid penalties** even if some filings are late—provided filing/pay history is clean.
- Forms automatically deemed ineligible (gift tax, estate, certain special information returns): if you use these, don’t count on AEP—but check if FTA or other reliefs are still applicable.
## Practical Compliance Tips
- Verify your **filing history** for the past three years: if any returns were late or payments unpaid by due dates, you may not qualify. Try to correct past delinquent returns if possible.
- For quoted foreign income or treaty-related liability, ensure you fulfil any U.S. reporting/filing obligations **on time**, even if the underlying income is foreign. Noncompliance here can disqualify you from AEP.
- When in doubt, file timely—even if you anticipate owing taxes. Payments can often be arranged; missing the filing deadline may create penalties that AEP could later help with.
- Keep all proof of payment & timely electronic records: IRS computers will check history. Clean records = clean relief automatically.
## Example Situations
- A U.S. resident abroad, filing *Form 1040* including foreign earned income and foreign tax credit, with no failures in filing/pay for past three years → AEP likely applies to any future penalties for unintentional late payments or filings.
- Someone who has used F-1 visa and filed information returns (e.g. FBAR) timely, meets the criteria → future late filing penalties for standard returns may be waived. But information returns themselves often excluded.
- If you have missed deadline for a Form 709 (gift tax), AEP likely won’t help—other reliefs must be sought.
## Watch for these Limitations
- AEP does **not cover all types** of filing/penalty situations—know whether your returns are eligible.
- Qualifying based on past history isn’t automatic if records show late payments or filings; overseas payments may have delays—always file before due date if possible.
- Notification: IRS will send a notice confirming that relief was granted; keep this notice for your records in case of audit or dispute.
## Key Takeaway
If you keep your U.S. tax filing and payment clean over time, the new AEP can largely remove penalty risk for certain failures—no need to apply. It rewards compliance and simplifies things. But confirm your eligibility, because some forms and past lapses can disqualify you.