Compliance
Maximizing Penalty Relief with the New Automatic Exemption from Penalty (AEP)
Learn how the IRS’s new AEP replaces First Time Abate and how eligible taxpayers can benefit without filing additional requests.
By NomadicTax Research Team • 5-8 min read • July 15, 2026
## What is AEP and Why it Matters
The **Automatic Exemption from Penalty (AEP)**—announced July 8, 2026—marks a major shift in federal tax penalty relief. The IRS will now **automatically suppress certain penalties** (failure to file, pay, or deposit) for taxpayers who’ve consistently filed and paid on time in the past, replacing the older First Time Abate (FTA) policy. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who Qualifies?
- Individual taxpayers with a clean compliance history 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))
- Business entities with timely compliance over the **past 12 consecutive quarters** for quarterly returns. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?os=wtmb5utKCxk5ref%3Dapp%3Futm_source%3Dsyndication&ref=app&utm_source=openai))
- Eligible returns include original returns (1040, 1120, etc.), quarterly and annual tax returns. Some forms—like information returns filed only in specific irregular situations (e.g., Form 706, Form 709)—are **not eligible**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## When it Takes Effect
- Applies **starting Summer 2026** for tax year **2025 returns** 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))
- FTA will be phased out; it's still possible to request FTA during the transition period. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Practical Tips for Taxpayers
1. **Check your compliance history** — ensure all returns are filed and taxes paid for the past three years. Any gaps may disqualify you.
2. **File on time or as soon as possible** — if you miss a deadline but meet past compliance, AEP may eliminate associated penalties.
3. **Keep documentation and records** — in case IRS records don’t reflect your payment history accurately.
4. **If you receive a penalty notice but believe you qualify** — contact IRS with proof of eligibility. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?os=wtmb5utKCxk5ref%3Dapp%3Futm_source%3Dsyndication&ref=app&utm_source=openai))
## Benefit Examples
| Scenario | Before AEP | After AEP |
|---|---|---|
| Missing a quarterly payroll deposit but had all timely filings/payments for the past year | You’d be assessed a failure-to-deposit penalty and request FTA manually | AEP would **automatically exempt** the penalty if eligibility is met |
| Late filing of a partnership return, clean filing history | File Form 1065, pay any due, then **request** FTA | No manual request needed under AEP |
## Why This Change Is Significant
- Reduces burden on taxpayers who may not have known about FTA or lacked ability to request it. ([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))
- IRS estimates AEP could help **over 1.5 million taxpayers** vs. 220,000 who used FTA in a comparable period. ([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))
- Improves fairness and consistency by recognizing past behavior without requiring individuals to take extra steps.
## Keep in Mind
- **Interest on taxes owed still accrues** even if penalties are exempted. [[How AEP works]] ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?os=wtmb5utKCxk5ref%3Dapp%3Futm_source%3Dsyndication&ref=app&utm_source=openai))
- Not all penalty types are eligible.
- IRS will send a **notice confirming** AEP if applied to your return. No action required to request it. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
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AEP brings welcome relief and simplification. If you’ve had a clean compliance history, this is one policy that lets you benefit without doing anything extra—but don’t let due dates slip anyway.