Compliance
Mastering Penalty Relief: How the New Automatic Exemption from Penalty (AEP) Changes the Game
Good news for diligent taxpayers: starting summer 2026, IRS is phasing out First Time Abate and automatically granting penalty relief to those with a history of timely filings and payments.
By NomadicTax Research Team • 6 min read • July 26, 2026
## What’s Changing: AEP Replaces First Time Abate
In July 2026, the IRS announced a major update to its penalty relief program: the **Automatic Exemption from Penalty (AEP)** will supersede the existing First Time Abate (FTA) relief. Under AEP, eligible taxpayers who have filed and paid on time in the prior **three years** (or **12 consecutive quarters**, for business/quarterly returns) will no longer need to request relief; penalties will simply not be assessed. This includes penalties for failure to file, failure to pay, or failure to deposit. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies and When It Applies
Eligibility basics:
- Must have a clean compliance history over the prior 3 years or 12 quarters. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- Applies to eligible returns: Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai))
- Begins with **tax year 2025** original returns and **2026 quarterly returns**. It will apply to future periods too. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What This Means for Taxpayers
- **Reduced administrative burden**: You no longer have to claim First Time Abate or file Form 843. The IRS does it for you if you qualify. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **Fairness and predictability**: Taxpayers with similar history receive similar treatment—no disparity based on awareness. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **Still liable for interest and taxes**: AEP doesn’t relieve tax owed or interest on late payments—just the penalties. If penalties aren’t eligible under AEP, you may still request reasonable cause relief. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical Examples
| Scenario | Under FTA | Under AEP |
|---|---|---|
| Single filer, timely filed last 3 years but late filing for 2025 taxes | Must request FTA via letter or Form 843 | Penalties suppressed automatically—no action needed |
| Business with quarterly tax returns that missed one deposit | If eligible under history, AEP applies to deposit penalty | Same—no penalty if meets criteria |
| Using an estate tax or gift tax form (e.g., Form 706 or 709) | FTA or reasonable cause, if applicable | AEP generally **not** available for these infrequent or event-based filings |
## Actionable Advice for Tax Planning and Compliance
- **Check your filing history** now. Make sure prior-year returns and payments are fully in IRS’s records. Gaps may cost you AEP eligibility.
- **Avoid late filing/payments** for 2026 and beyond wherever possible to maintain eligibility.
- **Monitor notices** from IRS. If you qualify, you’ll receive a confirmation that a penalty was not assessed.
- **Don’t neglect reasonable cause relief**: if you don’t qualify for AEP, serious situations may still permit relief under other rules.
## Considerations for Entities and Digital Nomads
Digital nomads or businesses with global income should ensure all required returns are timely filed and payments made—AEP won’t help if records are missing or you’ve missed prior year filings. Entities should ensure deposits (e.g., payroll) and estimated taxes are timely paid in all periods.
With AEP, responsibility shifts from taxpayers needing to request relief to qualifying through consistent compliance. If you’ve stayed up to date, summer 2026 could bring a welcome break from old penalty worries.