Tax Planning
Maximizing Automatic Exemption from Penalty (AEP): What Every U.S. Taxpayer Needs to Know
The IRS has launched the Automatic Exemption from Penalty (AEP), streamlining administrative penalty relief for those with a strong compliance track record—no more requesting First Time Abate in many cases.
By NomadicTax Research Team • 6 min read • July 29, 2026
## What is AEP?
The Automatic Exemption from Penalty (AEP) is a new IRS program announced **July 8, 2026** that will automatically provide relief from certain penalties—specifically, failure-to-file, failure-to-pay, and failure-to-deposit—for taxpayers who have demonstrated a consistent history of timely compliance. The IRS will replace the long-used First Time Abate (FTA) with AEP for eligible returns beginning with the 2025 tax year and 2026 quarterly returns. ([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 be eligible, a taxpayer must meet all of the following:
- Timely filed returns and paid any taxes due for **three prior years** (or 12 prior consecutive quarters for quarterly filers);
- Tax returns must be original and meet IRS record requirements; and
- Not have frequent or repeated deposit failures if the taxpayer is a business filing FTD (failure to deposit) penalties. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Not eligible cases
- Infrequent or event-driven filing such as Form 706 (Estate Tax) or Form 709 (Gift Tax) generally don’t qualify. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Certain penalties, like daily delinquency, and returns not fitting the original filing requirement, are excluded. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?os=os&ref=app&utm_source=openai))
## When does AEP take effect and what is the transition?
- **Begins summer 2026**: The new process is rolling out now; for original returns beginning with the **2025 tax year** and **2026 quarterly returns**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **FTA remains available** during the transition period for certain returns (e.g., 2024 tax returns; 2025 returns and quarterly returns processed before AEP starts). ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- For returns with original due dates **on or after January 1, 2027**, AEP will fully replace First Time Abate. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Why this matters: Benefits & Risks
**Benefits:**
- ✅ No need to request the relief—if you qualify, it’s automatic;
- ✅ Reduces burden and enhances fairness, especially for those unaware of FTA eligibility. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/nta-blog/a-long-awaited-taxpayer-win-the-irs-implements-automatic-penalty-relief/2026/07/?utm_source=openai))
**Risks / What to consider:**
- Penalties will still apply if you're **late filing**, miss a payment, or miss a deposit—but AEP, not the law, waives assessment. Interest and any non-covered penalties still apply. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- You won’t be notified in advance whether you’ll qualify—only after return processing. Keep good records. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Practical steps to prepare
1. **Review your filing history** for the past three years: Were all returns filed on time, and taxes paid when due? If you missed any, you may fall short of eligibility.
2. **Ensure deposit compliance** if you're a business submitting payroll or similar taxes—some penalties here disqualify you if frequent failures. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
3. Keep copies of all notices—if you don’t receive an “AEP applied” notice when you believe you qualify, reach out. FTA might still apply in the interim. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
4. **Don’t delay filing even if late**—if you expect to meet AEP criteria, file as soon as possible to begin the process. Every delay adds interest and potential penalties not covered under AEP.
## Example
**Case A**: Jane has timely filed her personal tax returns for 2022, 2023, and 2024, has always paid her taxes and deposits on time. She files her 2025 return late but meets the eligibility criteria. Under AEP, **the IRS will not assess the failure-to-file or failure-to-pay penalties**, but interest on any unpaid tax will still accrue. She’ll receive a notice saying penalties weren’t assessed due to the exemption.
**Case B**: A small business has missed payroll tax deposits several times over the past three years. Even if it meets other requirements, frequent deposit penalty history will disqualify it from AEP relief for FTD penalties. It might still qualify for FTA during transition or request reasonable cause relief.
## Next steps if you don’t qualify
- You can still request relief under **First Time Abate (FTA)** during the transition period on eligible returns. ([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- Or apply for penalty relief based on **reasonable cause** if unexpected events prevented timely filing or payment.
AEP is a game-changer for taxpayers who are consistent and compliant. Preparing ahead lets you benefit—and avoid avoidable costs.