Compliance
Navigating Automatic Penalty Relief: What Taxpayers Need to Know for 2025 and Beyond
The IRS has replaced First Time Abate with a new Automatic Exemption from Penalty (AEP)—learn who qualifies, what penalties are affected, and how to benefit without filing extra forms.
By NomadicTax Research Team • 5-8 min read • July 10, 2026
## What Is the Automatic Exemption from Penalty (AEP)?
Effective summer 2026, **AEP** is a new process by which the IRS grants **penalty relief automatically** to eligible taxpayers—no need to request it as under the previous **First Time Abate (FTA)** program ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
### Which Penalties Are Covered?
The categories include penalties for:
- Failure to file a return (Forms 1040, 1065, 1120)
- Failure to pay tax due
- Failure to deposit payroll or excise taxes as required ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai)).
### Who Qualifies?
To qualify for AEP, you must have:
- Filed **required original returns** and paid taxes when due for the **prior three tax years** (or 12 consecutive quarters for quarterly filings) ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
- Not been disqualified by multiple failures, specifically for business taxpayers, “failure to deposit” penalties or misuse of EFTPS (Electronic Federal Tax Payment System) rules cannot occur frequently in those prior years ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?utm_source=openai)).
Certain returns are **not eligible**—notably estate‐tax (Form 706), gift tax (Form 709), or filings tied to one‐off events or infrequent obligations. Also, not all penalties are relieved—interest still accrues, and non‐eligible penalties remain payable ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
## Transition Timing and Important Dates
- AEP will begin applying **summer 2026** for tax year **2025** original 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)).
- First Time Abate is being phased out and will be replaced by AEP for returns with original due dates **on or after January 1, 2027**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)).
- During transition, some taxpayers may still receive notices under FTA but may later be corrected if they were eligible for AEP. Keep all notices and letters until resolved.
## How This Affects Compliance and Planning
Here are actions you can take:
- **Self‐assess your compliance history**: if you regularly file returns on time and pay, you may be eligible without asking.
- **Reduce risk of penalties going forward**: use EFTPS correctly, avoid recurring deposit failures.
- **If you receive a notice with penalties**, review whether AEP should be applied; IRS will send you a letter if relief is granted.
- **Recordkeeping** remains important: you’ll want proof of timely filings and payments for prior years.
## Example Cases
| Taxpayer | Eligible for AEP? | Result Without Request |
|---|---|---|
| Jane, individual who filed all years on time for last 3 years; pay taxes by due date. | ✔ Yes | No failure‐to‐file or late‐correction penalties levied even if returns or payments late in 2025. |
| Small business missed one payroll tax deposit in 2023. | May be disqualified under business deposit rules. | Could still use FTA if available, but AEP may not apply. |
| Estate files Form 706 | Ineligible | Penalties assessed per statute; need to use other relief avenues. |
## Key Takeaways
- AEP is **automatic**—if you qualify, you don’t need to ask.
- It **simplifies** the system and increases fairness, especially for those unaware of FTA.
- But it doesn’t remove interest or all penalties—compliance history still matters.
- Stay current with tax obligations; eligibility is based on consistency.
**Action step**: Review your past three years of tax returns and payments now—if everything was timely, expect fewer penalties, even if something slipped this year.