Compliance
Mastering U.S. Penalty Relief: Automatic Exemption from Penalty (AEP) Explained
IRS is replacing First Time Abate with the Automatic Exemption from Penalty (AEP), offering eligible taxpayers relief from certain penalties without needing to ask—all beginning summer 2026.
By NomadicTax Research Team • 5-8 min read • August 3, 2026
## What is AEP and Why It Matters
The **Automatic Exemption from Penalty (AEP)** is a new IRS program announced on July 8, 2026 (IRS-IR-2026-83) that replaces the First Time Abate (FTA) relief. It automatically prevents certain penalties from being assessed if a taxpayer has a history of timely filing, paying, and depositing. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
This change matters because many taxpayers who qualified for FTA never applied—either due to lack of awareness or difficulty contacting the IRS. AEP removes that extra step. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## How AEP Works: Eligibility and Coverage
| Requirement | Details |
|-------------|---------|
| **Compliance history** | • Three prior years of timely filing and paying taxes for annual returns. <br>• For quarterly filings, 12 consecutive quarters of compliance. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
| **Covered return types and penalties** | • Eligible penalties for failure to file, failure to pay, and failure to deposit. <br>• Return series include Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, CT-1. <br>• Not included: penalties for information returns in response to infrequent events, daily delinquency penalties, and certain other penalty types. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai)) |
| **Effective dates** | • Applies to original annual returns for the 2025 tax year, and to quarterly returns for 2026 and future periods. <br>• FTA will be phased out for returns with original due dates Jan. 1, 2027 or later. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) |
## Action Steps for Taxpayers
- **Maintain your compliance**: Ensure your filing, payment, and deposit history meets the eligibility criteria. If one year fails, you may not qualify. <br>- **Don’t wait for a request**: No need to apply—if you're eligible, AEP is automatic. <br>- **Watch for IRS notices**: When AEP is applied, the IRS will send you a notice saying that a penalty was *not* assessed because of timely compliance. <br>- **If you get a penalty notice and believe you qualify**: Contact IRS using the number on the notice—explain that you think you were eligible for AEP or reasonable cause relief or FTA (if still available for that period). <br>- **Keep good records**: Proof of timely payments and filings will help if you need to make a request or appeal.
## Example Scenarios
- *Annual filer*: Emily has filed and paid her 2022, 2023, and 2024 Form 1040 returns on time. She misses the April 2026 deadline for her 2025 return and gets charged failure to file and failure to pay. Under AEP, because she meets the 3-year compliance history, those penalties may be **automatically suppressed**.
- *Quarterly filer*: Jordan files quarterly employment taxes using Forms 941 and made deposits on time for the past 12 quarters. However, one quarter in 2026 he missed the deposit deadline. Under AEP, if other eligibility criteria are met, failure to deposit penalties may be **not assessed** automatically.
## What AEP Does *Not* Do
- It **doesn’t waive tax owed**—only certain penalties are covered. <br>- It **doesn’t change interest**: interest on unpaid tax still accrues. <br>- Some penalties still aren’t eligible (e.g. for rare events, information-reporting returns, or severe noncompliance). <br>- For returns due Jan. 1, 2027 or later, only AEP applies—FTA will no longer be available for those periods.
## Bottom Line
AEP offers a more consistent, fair process for those who comply—saving time, paperwork, and accidental penalties. If you’ve taken care of your returns and payments, AEP should work for you without any extra action.