Compliance

Mastering the Automatic Exemption from Penalty (AEP): What Eligibility Looks Like

AEP replaces First Time Abate, offering automatic penalty relief for compliant taxpayers. Here’s who qualifies, when it starts, and how to ensure you benefit.

By NomadicTax Research Team • 5-8 min read • July 9, 2026

## What is AEP and Why Does It Matter? The **Automatic Exemption from Penalty (AEP)** is a new IRS program announced in *IR-2026-83* (July 8, 2026), set to start in summer 2026. It **automatically waives certain penalties** for taxpayers who have filed and paid on time over the previous three years (or 12 consecutive quarters for businesses), eliminating the need to request relief. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) This replaces the older **First Time Abate** program, which required a formal request. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) ## Who Qualifies Under AEP? To be eligible, you must: - Have a **clean filing history**: filed required returns and paid due amounts on time for the **three prior 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)) - File an **eligible type of return**: - Forms like 1040, 1120, 1065 or employment returns (940, 941, etc.) may qualify. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai)) - Note what doesn’t qualify: information returns, infrequent event-based filings (Form 706, 709), and certain others are excluded. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) ## Effective Timing & Transition - AEP relief applies to **eligible original returns beginning with the 2025 tax year** and **2026 quarterly returns** onward. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) - **First Time Abate** will be **phased out**, with AEP becoming the default for returns due **on or after January 1, 2027**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) ## What Penalties Are Covered? Penalties automatically relieved under AEP include: - Failure to **file** required returns (e.g., IRC 6651(a)(1)) - Failure to **pay** tax by due date (IRC 6651(a)(2) or (3)) - Failure to **deposit** required amounts (IRC 6656) ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai)) Note: **Interest, other penalties not listed, and non-eligible returns** are not covered. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) ## What You Should Do Now — Actionable Steps - **Check your compliance history**: If you’ve filed and paid on time over recent years, you may qualify—track returns and payments for the last three years. - **Review your return types**: Confirm whether the types of returns you file are eligible under AEP. - **Wait for IRS confirmation**: If qualified, you’ll receive a notice after processing. The relief is **automatic**, no action required. If you get a penalty notice anyway, you can challenge it. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) - **Keep records of timeliness**: Retain proof of filing and payment dates; useful if you have to show eligibility. ## Case Example **Scenario A:** Sarah files her Form 1040 each year on time, pays her taxes when due — her 2022, 2023, and 2024 tax years are clean. She files Form 1040 for 2025 late. Under AEP (for returns in 2025), no penalty will be assessed for the failure to file or pay due to her qualified status. **Scenario B:** A small business files Form 941 each quarter and has met deposit requirements and filed timely for 12 consecutive quarters ending 2025. If it misses a deposit in mid-2026, it may get relief under AEP assuming all other criteria are met. ## Benefits & Trade-Offs **Benefits:** - Removes burden of having to request relief. - Provides consistency and less hassle for compliant taxpayers. **Trade-Offs:** - Doesn’t cover **all** penalties or return types. - Non-eligible taxpayers must still apply for **reasonable cause** relief if needed. ## Key Takeaways - **AEP kicks in summer 2026** and replaces First Time Abate as its default in 2027. - To gain relief, maintain clean filing and payment history. - Understand what return types are eligible. - Stay alert for notices — IRS may issue penalty notices erroneously if transitioning fences are still in place. By taking proactive steps now, taxpayers can position themselves to benefit fully from AEP and avoid unnecessary penalties under the new regime.