Compliance
Leveraging the IRS’s New Automatic Exemption from Penalty (AEP) for Clean Tax Compliance
The IRS has introduced the **Automatic Exemption from Penalty (AEP)** to replace First Time Abate—simplifying relief for taxpayers with a strong track record. Learn how to qualify and reduce your audit risk.
By NomadicTax Research Team • 5-8 min read • July 21, 2026
## What is the Automatic Exemption from Penalty (AEP)?
Recently announced via **IRS News Release IR-2026-83** on **July 8, 2026**, AEP is a new program replacing the First Time Abate (FTA) administrative relief. Taxpayers with a history of filing and paying on time can **automatically avoid certain penalties** without having to request relief. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Which penalties are covered?
AEP applies to penalties for:
- Failure to file returns,
- Failure to pay taxes,
- Failure to deposit required amounts.
It **does not include** penalties like accuracy-related penalties, daily delinquency penalties, information return penalties, and other non-listed penalty types. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Who qualifies for AEP?
To benefit from AEP, you must:
1. Be a taxpayer (individual or business) who filed returns on time and paid tax due on time for the **three prior years** (or have **12 successive quarterly returns** meeting those criteria for quarterly filers). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
2. Have an “original” return at issue. AEP begins with tax year 2025 returns and 2026 quarterly returns; penalties need to arise from those periods or later. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
3. Be filing eligible forms (e.g. Forms 1040, 1120, 941, etc.). Some forms and situations (like estates, infrequent filings) are excluded. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## How it works—no action needed!
AEP is **automatic**. If you meet the eligibility criteria and process an eligible return with late filing/payment/deposits, **the IRS will not assess the specified penalties during normal processing**. You will receive a **notice** confirming the relief. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Transition from First Time Abate (FTA)
FTA remains available temporarily—for certain 2024-2025 returns and 2026 quarterly returns processed **before AEP fully starts**. After the transition (starting Jan. 1, 2027, for many returns), FTA will be phased out. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Examples and practical guidance
| Scenario | Eligible for AEP? |
|---|---|
| Alice has filed on time and paid her 2022-2024 taxes on time. In 2026 she files the 2025 return late. | ✅ Eligible (meets 3 prior years of compliance) |
| Bob misses two quarterly estimated tax payments in 2025, but is timely in other obligations. He files the 2025 return late. | ❓ Might not qualify unless all quarterly filings and payments over 12 consecutive quarters meet criteria. |
| Carol is applying for parental gift tax or estate-tax forms only occasionally. | ❌ Those infrequent/infrequent event-based returns are generally not eligible under AEP. |
## Action items to benefit from AEP
- Keep clean records of filing and payments for the past 3 years or 12 quarters.
- Be on time with estimated payments, payroll deposits, and filing returns.
- For returns or quarters right around the transition period (2025-2026), check if AEP applies or if FTA must be requested.
- If you haven’t received a notice but believe you qualify, contact IRS customer service.
## Impact on Tax Planning & Compliance
This is a **medium-impact** change. AEP reduces administrative burden and lowers the risk of getting hit with late penalties for taxpayers who have been compliant—but **it doesn’t replace interest due or other penalties beyond its scope**. It strengthens incentives to maintain timely compliance. It also simplifies tax planning for small businesses and individuals who are usually very organized.
By integrating AEP into your compliance strategy, you can avoid last-minute stress and penalty risks, especially during busy seasons or when transitioning through complex tax periods.
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*Author: NomadicTax Research Team*