Compliance
Navigating the IRS’ New Automatic Exemption from Penalty (AEP): What Compliance Means for You
The IRS now offers automatic penalty relief for compliant taxpayers—understanding the qualifying criteria and action points can save you stress and costs during these major transitions.
By NomadicTax Research Team • 6 min read • August 10, 2026
## What’s Changing: First Time Abate → Automatic Exemption from Penalty (AEP)
As of **Summer 2026**, the IRS is phasing out the **First Time Abate (FTA)** program and expanding a newer, automatic program called **Automatic Exemption from Penalty (AEP)**. Under AEP, eligible taxpayers will get relief *without needing to request it*. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
FTA historically allowed eligible taxpayers to request abatement of failure-to-file or failure-to-pay penalties if they had clean compliance for three previous years. AEP builds on these eligibility criteria but shifts to automatic application—saving time and reducing burden. ([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 receive AEP, you must:
- Have three consecutive years of filing required returns on time,
- Have paid any taxes due in those years,
- For quarterly returns, maintain timely compliance for 12 consecutive quarters. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
Not eligible if:
- Filing is infrequent or tied to special events (e.g., Form 706, Form 709)
- The penalty is for accuracy issues or reporting failures beyond “file/pay/deposit” types
- The penalty is Daily Delinquency Penalty or not specifically provided relief under AEP. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## When AEP Applies
- *Original returns* for **tax year 2025** and all **2026 quarterly returns**, and thereafter. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- FTA remains available for eligible returns during transition until AEP fully replaces it for return 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))
## Practical Compliance Checklist
- Keep ALL required returns filed and taxes paid on time for the prior three years.
- If you file quarterly (e.g. small business owners or corporation), ensure the last 12 quarters are compliant.
- Monitor notices: if AEP applies, the IRS will send a letter confirming the relief was granted—for returns processed under AEP. ([irs.gov](https://www.irs.gov/payments/administrative-penalty-relief?campaign=home&redirect_count=1&redirect_id=8a0ae530-a817-4298-b4d6-10e444c289d8&utm_source=openai))
- If you get a penalty notice and believe you qualify, contact the IRS to investigate whether AEP should’ve automatically applied. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Example Scenario
John, a small business owner, files quarterly returns using Form 941 and has been timely filing and paying taxes for the last 12 quarters (2023–2025). He misses the deposit deadline for one quarter in 2026.
- Under FTA, he would need to *request* relief.
- Under AEP, since he meets eligibility, this penalty should be suppressed automatically and he’ll get a notice saying so. No request needed. If no notice is received, he can still follow up.
## Action Steps You Should Take Now
- Audit your records—ensure no gaps in returns/taxes paid in the last three years.
- For upcoming payments or filings, double-check deadlines to stay compliant.
- Keep copies of communications from IRS; notice letters matter.
- Ensure any specialized filings are properly understood (some not eligible for AEP).
Automatic penalty relief represents a major shift toward fairness and simplicity in U.S. tax compliance. If you’ve maintained consistent compliance, this system should shield you from certain penalties without prompting — but staying informed and organized still makes all the difference.