Compliance
Leveraging the New Automatic Penalty Relief: What Taxpayers Should Know
The IRS has introduced the Automatic Exemption from Penalty (AEP) to replace First Time Abate—our guide helps you determine eligibility, understand covered returns, and take advantage without the paperwork.
By NomadicTax Research Team • 5-8 min read • September 11, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
The IRS is phasing out the **First Time Abate** program and replacing it with the **Automatic Exemption from Penalty (AEP)** starting in summer 2026. AEP provides automatic relief from certain penalties for taxpayers with a history of timely filings and payments—in other words, you won’t need to apply. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Which Penalties and Returns are Covered
AEP applies to original returns for **tax years 2025 and later**, as well as to quarterly returns. The relief covers penalties for:
- Failure to file on time
- Failure to pay on time
- Failure to deposit when required
Not all returns qualify. For example: information returns, estate or gift tax returns (like Form 706 or 709), or returns filed only due to specific transactions or occasional events are **not eligible**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Eligibility Requirements
To qualify, taxpayers must have a reliable history of compliance:
- Filed returns and paid any taxes due for the prior **three years** (for annual filers)
- For quarterly filers, **12 consecutive quarters** of compliance with filing and payment requirements ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What This Means in Practice
Here’s how to determine whether you're eligible and how you’ll know:
| Scenario | Qualified Under AEP? |
|---|---|
| Filed all annual income tax returns for 2023–2025 and paid taxes on time | ✅ Yes |
| Missed a quarterly estimated tax payment in Q2 of 2025 but otherwise compliant | ❌ No |
| Filed a Form 1099 (info return) late | ❌ Not eligible if only because of that form |
If eligible, the IRS will **automatically apply** AEP—there’s nothing you need to do. You’ll receive a notice confirming the relief. If the IRS doesn’t grant AEP and you believe you should qualify, you still have the option to request relief using **reasonable cause** rules. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Action Items to Prepare
- **Review your filing history** to see if there are gaps in compliance over the past few years.
- **Check payment records** to ensure taxes were paid on time for those years.
- **Keep documentation** if you anticipate claiming reasonable cause, in case AEP is not granted.
- Consider working with a tax professional to ensure everything is in order during the transition out of First Time Abate.
## Why It Matters
This change is expected to **significantly reduce burden** for many taxpayers who might otherwise have had to request abatement. It increases fairness by making relief automatic for those who have maintained compliance, and it helps reduce uncertainty around penalty assessments.
With effective date starting for returns due in 2025 and quarterly periods now, this is not a distant policy—it’s already in motion. Activate these steps early to benefit automatically under AEP.