Compliance
Navigating Automatic Exemption from Penalty (AEP): What U.S. Taxpayers Need to Know
The IRS is transitioning to a new penalty relief system in summer 2026—learn who’s eligible, how it works, and what to watch out for.
By NomadicTax Research Team • 5-8 min read • August 24, 2026
## What AEP Is and Why It Matters
The IRS has introduced the **Automatic Exemption from Penalty (AEP)** as a permanent, automatic replacement for the First Time Abate (FTA) program. AEP begins applying in **summer 2026**, and is designed to reduce burden on taxpayers with strong compliance histories by removing certain penalties **without 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))
## Eligibility Criteria
To qualify for AEP, a taxpayer must meet the following requirements:
- **Timely filing and payment** over the **three prior years** (or **12 consecutive quarterly returns**)
- No disqualifying penalties (or only penalties that were assessed and later abated due to IRS error or reasonable cause) in those periods([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Returns that are **event-based**, such as **estate tax (Form 706)** or **gift tax returns (Form 709)**, generally aren’t eligible. Also, **information return penalties**, **accuracy-related penalties**, and the **Daily Delinquency Penalty** are excluded from AEP relief.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Penalties Are Covered
AEP prevents the assessment of penalties for:
- Failure to file on time
- Failure to pay on time
- Failure to make deposits on time([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Other penalties still apply—for example, interest on late payments, penalties for underpayment of estimated tax, or penalties unconnected with these core compliance actions.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Effective and Transition Dates
- *Applicable to original returns* beginning with **tax year 2025**, and **quarterly returns for 2026 and after**.([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** during summer 2026. For returns with due dates on or after **January 1, 2027**, FTA is no longer available.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What Taxpayers Should Do
- Check your compliance history—do you have three years of filing and paying on time? If yes, you may qualify automatically for AEP.
- Even if you meet the criteria, **continue to file and pay on time**. AEP does not apply to interest, and it doesn’t negate unfiled returns.
- Keep an eye on your IRS notices. If AEP is applied to your return, you’ll receive a notice confirming that certain penalties were not assessed.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- If you don’t qualify but believe you have reasonable cause, you can still request relief via traditional channels.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Real Example
Suppose **Jane**, a sole proprietor with a history of filing her 2019, 2020, and 2021 returns on time and paying any tax due. For her 2025 individual return and 2026 quarterly filings, she misses the tax deadline and pays late. Under AEP, provided her earlier compliance history is clean, Jane would **not be assessed failure-to-file or failure-to-pay penalties** for those returns. However, she must still pay the unpaid tax and any accrued interest. She will receive a notice stating **AEP relief was applied**, without needing to file any special request. This changes what used to require her to actively request First Time Abate.
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