Compliance
Mastering Penalty Relief: Understanding the New Automatic Exemption from Penalty
Explore how the IRS’s new penalty relief process works, who qualifies for it, and how it affects your penalty exposure for tax years 2025 and 2026.
By NomadicTax Research Team • 5-8 min read • August 1, 2026
## What is Automatic Exemption from Penalty (AEP)?
The IRS is replacing the existing *First Time Abate* relief with a new **Automatic Exemption from Penalty (AEP)** program. Under AEP, eligible taxpayers with a strong compliance history **won’t need to file a separate request** to have certain penalties waived — the relief will be applied *automatically*. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who qualifies for AEP?
To benefit from AEP, you must:
- Have filed **original returns** and paid any tax due on time for the **prior 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));
- Be current on **failure to file**, **failure to pay**, or **failure to deposit** penalties for the returns in question;
- Submit **eligible returns**: this includes individual returns, many business returns, and certain 2025 and 2026 returns with original due dates. Note: **information returns**, estate and gift tax returns, and some infrequent filings are excluded. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Effective dates & transition period
AEP begins **summer 2026**, covering eligible penalties for tax years **2025 and 2026**. First Time Abate will be phased out, with AEP becoming the standard relief program for **returns due on or after January 1, 2027**. During the transition, some taxpayers might still receive penalty notices under First Time Abate. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical examples
- **Example 1**: Maria has filed her individual tax returns timely and paid all taxes for 2022–2024. She owes a penalty for late payment for her 2025 return. Under AEP, if she qualifies, that penalty would be waived automatically — she doesn’t need to submit a specific abatement request.
- **Example 2**: A small LLC has missed a quarterly estimated tax payment due May 2025. Even with consistent compliance in previous years, unless all prior deposits and returns are timely, AEP may **not** apply. Reasonable cause relief might still be available.
## What’s NOT covered by AEP?
- Information returns (forms like 1099 series, etc.) are generally **not eligible** for AEP relief ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai));
- Returns filed *only* because of a rare or one-time event (e.g., Form 706, U.S. Estate Tax Return) are excluded from automatic relief systems.
## Actions taxpayers should take
- **Verify compliance history**: ensure past returns were filed on time and all taxes paid. If there are missed filings, catching up may restore eligibility.
- **Maintain documentation**: keep proof of payment and timely filings—this assists if you're marginally eligible or need to demonstrate reasonable cause.
- **Monitor IRS notices**: when AEP is granted, the IRS will issue a confirmation notice; keep this with your tax records.
- **For excluded taxpayers**, explore other relief under “reasonable cause” or hardship.
## Implications & benefits
- AEP streamlines administrative burden, **saving time** and reducing paperwork for many who would otherwise file abatement requests.
- For consistent filers, this provides **certainty and predictability**, lowering the risk of unexpected penalties.
- Ensures **fairness**, as compliance is rewarded without needing additional processes.
- For tax planners, it changes how you think about risk: staying compliant year-to-year now has even greater payoff.
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**Bottom line**: If you've maintained timely filings and payments, expect the IRS to take care of certain penalties automatically in 2025 and 2026. For those who haven’t, there’s still relief available, but you’ll need to take action.