Compliance
Mastering the **Automatic Exemption from Penalty (AEP)** under U.S. Federal Tax Law
Learn how the IRS’s new Automatic Exemption from Penalty simplifies relief for eligible taxpayers—what qualifies, what’s covered, and how it affects you.
By NomadicTax Research Team • 5-8 min read • August 29, 2026
## What is AEP?
The **Automatic Exemption from Penalty** (AEP) is a new relief program introduced by the IRS starting in **summer 2026**. It replaces the First Time Abate (FTA) program and automatically provides relief from certain penalties—*without taxpayers having to request it*. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who qualifies?
To be eligible, taxpayers must have a strong compliance history:
- **Individuals** must have filed returns and paid the full amount due on time for the **prior three years**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **Quarterly filers** (e.g., some businesses) need **12 consecutive quarters** of timely filing and paying. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Certain returns—including Form 706 (Estate Tax Return) and Form 709 (Gift Tax Return)—are **not eligible**. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
## What penalties can AEP remove?
If you qualify, AEP removes:
- **Failure-to-file** penalties;
- **Failure-to-pay** penalties;
- And for businesses, **failure-to-deposit** penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Note: It **doesn’t** erase interest on overdue taxes, taxes themselves, or penalties not covered under AEP. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## When does it apply?
- AEP applies to **original individual returns** with due dates on or after **January 1, 2025**, and to **quarterly returns** for 2026 and onwards. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- The First Time Abate relief is being phased out and will become unavailable for eligible returns starting **January 1, 2027**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical examples
| Scenario | Yes—AEP Applies | No—AEP Doesn’t Apply |
|---|---|---|
| You filed your 2025 return on time, paid taxes due, and met prior‐3‐year compliance. IRS won’t assess FTF or FTP penalties for that return. | ✅ | ❌ |
| Quarterly business returns with 12 consecutive timely quarters—failure to deposit penalty from 2026 Q3 waived. | ✅ | ❌ |
| Inherited land, filed Form 706. Penalties from that form are not eligible. | ❌ | ❌ |
## Actionable steps
- **Check your compliance history**—do you qualify based on past returns? If yes, expect relief automatically.
- **No need to contact IRS** if eligible—IRS will send a notice confirming the penalty relief. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/tax-tips/tips-for-taxpayers-who-may-qualify-for-automatic-penalty-relief/2026/08/?utm_source=openai))
- If you receive a penalty despite eligibility, you can still request relief under First Time Abate while it's being phased out, or claim relief for **reasonable cause**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Key takeaways
- AEP simplifies penalty relief and shifts burden from taxpayer to IRS for eligible cases.
- Keeps the requirement of **punctual tax and payment history** front and center.
- But doesn’t cover **all forms** or penalties.
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**Bottom line:** If you’ve been diligent with your tax filings and payments, expect fewer surprises—penalties may no longer need to be requested. If you're unsure whether you qualify, keep documentation and be ready to assert your history if needed.