Compliance
Navigating IRS’s Automatic Exemption from Penalty (AEP): What Taxpayers Need to Know
The IRS is replacing the First Time Abate relief with an automatic penalty relief system—AEP—that rewards taxpayers with a clean compliance history without the need to file special requests.
By NomadicTax Research Team • 5-8 min read • August 5, 2026
## What is AEP and Why It Matters
In July 2026, the IRS launched **Automatic Exemption from Penalty (AEP)** to streamline how penalties for failure to file, pay, or deposit are relieved. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) Unlike the First Time Abate (FTA) program, which required taxpayers to proactively request relief, AEP applies relief automatically to eligible taxpayers based on a history of timely filings and payments. ([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 obtain the exemption, taxpayers must meet these requirements:
* Keep a **three-year record** of timely filing and paying taxes. For quarterly filers, that means **12 consecutive compliant quarters**. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
* Use eligible forms and return types including Forms **1040, 1120, 941**, among others. Returns filed only for specific or infrequent events like **Form 706 or 709** are generally excluded. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## When It Comes into Effect
AEP begins applying in **Summer 2026**
* Applies to **original returns** for **tax year 2025** and to **2026 quarterly returns** and all subsequent eligible periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
* The FTA relief is being phased out and will be replaced entirely by AEP effective **January 1, 2027**. Returns with original due dates from that date forward will follow AEP fully. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## How AEP Works in Practice
When a taxpayer files a return or pays late, but qualifies under AEP, **no penalty** will be assessed during processing. The IRS will send a notice confirming that relief was granted. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai)) If you still receive a penalty and believe you qualify, you can contact the IRS to have it removed. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?campaign=home&redirect_count=1&redirect_id=e5a24f9b-8f01-4e82-b50c-a7f2c95d5a4a&utm_source=openai))
## Practical Examples
**Example 1—Individual filer**
- Jane has filed and paid all her returns on time in 2022, 2023, and 2024. She files her 2025 return late—in April 2026. Because she meets the eligibility for 2025 returns, she qualifies for AEP, and no late-filing penalty will be assessed.
**Example 2—Quarterly business filer**
- A small business uses quarterly returns (Forms 941, 940, etc.). It has been compliant for all 12 previous quarters. In Q2 2026, a payroll deposit is late. Under AEP, the failure-to-deposit penalty won’t be assessed, provided this is the first eligible quarter under AEP.
## What This Means Strategically
* Keep current with filings and payments—this builds your eligibility.
* Keep copies of notices. If AEP should apply but doesn't, you’ll need documentation to demonstrate the eligibility.
* Use this grace to improve compliance processes—late notices can still hold interest and other compliance consequences.
## Action Steps
1. Review your filing history for the past three years. If any returns or payments were delinquent, you likely don’t qualify yet.
2. Confirm that your return types are eligible. If you file Form 706 or 709, for instance, you’ll need to rely on other relief mechanisms.
3. If a penalty notice comes in and you believe you qualify, respond to the IRS referencing the Automatic Exemption from Penalty program.
AEP signifies a meaningful shift toward fairness and simplicity in tax administration—provided taxpayers maintain good habits and accurately document their compliance history.