Compliance
Mastering U.S. Penalty Relief: How the Automatic Exemption from Penalty (AEP) Changes the Game
The IRS has rolled out the Automatic Exemption from Penalty (AEP) program, replacing First Time Abate – here's how you may now automatically avoid certain penalties if you have a clean compliance record.
By NomadicTax Research Team • 5-8 min read • July 25, 2026
## What is AEP and Why It Matters
The **Automatic Exemption from Penalty (AEP)** is a new IRS program announced in July 2026, which replaces the First Time Abate administrative penalty relief ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)). Under AEP, taxpayers with a history of timely filing and payment can receive certain penalty relief automatically, without needing to request it ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai)).
### Key Features of AEP
- Applies to **failure to file**, **failure to pay**, and **failure to deposit** penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Eligibility requires a history of compliance: three prior years of timely filing and payment (or 12 consecutive quarters of timely compliance for quarterly returns). ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- Begins with **original returns** for the **2025 tax year** and some **2026 quarterly returns**, and continues thereafter. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- First Time Abate (FTA) still exists during the transition period but will be phased out; after January 1, 2027, FTA is no longer available for applicable returns. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### What AEP Doesn’t Do
- Does **not apply** to **all penalty types**: penalties like accuracy-related, information return penalties, or daily delinquency penalties are excluded. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- Taxpayers must still **file returns** and **pay taxes or make deposits** on time; AEP doesn’t erase **interest** or penalties for types not covered. ([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 |
|---|---|---|
| You missed **one tax filing deadline** in 2025, but had been compliant for the prior three years. | You’d need to request FTA relief manually. | AEP will prevent the penalty automatically if you qualify. |
| A business missed a payroll tax deposit for Q1 2026. | Must request FTA for relief. | If you’ve met 12 prior quarters of compliance, AEP excludes penalty automatically. |
| You incurred an **accuracy-related penalty** in your business return. | FTA doesn’t cover this either; you'd need reasonable cause. | AEP doesn’t cover it. Accurate reporting remains necessary. |
## Actionable Steps You Can Take Now
* **Check your history**: confirm timely filing and payment for the past 3 years (or prior 12 quarters if applicable). If there were earlier missed filings or late payments, AEP may not apply.
* **Identify eligible returns**: Forms 1040, 1120, 941, etc., failure to file/pay/deposit penalties are included; estate and gift tax returns (e.g. Form 706, Form 709) are generally excluded ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
* **Don’t rely on AEP to bail you out**: AEP doesn’t replace good compliance, and it doesn’t cover everything.
* **If you don’t qualify** for AEP, you can still request relief using **reasonable cause provisions**. Documentation is key—medical emergencies, natural disasters, or other serious circumstances can qualify.
## Implications for Tax Planning & Compliance
- For **individuals** and **businesses**, AEP potentially reduces administrative burdens and ensures fairness. No more missing out simply because you didn’t know or didn’t submit a request.
- For **advisors**, it simplifies advising eligible taxpayers, while shifting focus to ensuring ongoing compliance.
- For **IRS operations**, this may reduce the volume of abatement requests, allowing resources to go to more complex taxpayer issues.
## Bottom Line
If you’ve kept up with your filings and payments, AEP could mean avoiding certain penalties *without lifting a finger*. Consider reviewing your compliance history, identify return types and deadlines, and update your processes to ensure eligibility. With FTA on its way out in many cases, preparing now will save you stress and money down the road.