Compliance
Navigating the New IRS Automatic Penalty Relief: What Taxpayers Need to Know
IRS introduces the Automatic Exemption from Penalty (AEP) in Summer 2026 to replace First Time Abate, offering automatic relief for late filing, payment, or deposit penalties for those with a consistent compliance history.
By NomadicTax Research Team • 5-8 min read • July 17, 2026
## What is the Automatic Exemption from Penalty (AEP)?
The IRS has launched a new relief program known as **Automatic Exemption from Penalty (AEP)**, effective **summer 2026**. It’s designed to replace the long-standing *First Time Abate (FTA)* program, making penalty relief automatic for qualifying taxpayers rather than requiring a request.([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 be eligible, taxpayers must meet these core criteria:
- **Three prior years** of timely filing returns and paying any tax due, or **12 consecutive quarterly filings** for quarterly returns.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Applies to returns beginning with **tax year 2025**, and to **2026 quarterly returns**, as well as future tax periods.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **Return types eligible** include Form 1040, 1065, 1120; payroll returns like Forms 940, 941, 943, 944, 945; and Form CT-1.([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))
## What penalties are covered (and what’s not)
**Covered penalties (if eligibility is met):**
- Failure to file
- Failure to pay
- Failure to make timely deposits
**Not covered by AEP:**
- Daily Delinquency penalties
- Accuracy‐related or information‐return penalties
- Infrequent or special returns such as estate tax (Forms 706), gift tax (Form 709), or certain information return penalties.([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
## Transition from First Time Abate (FTA)
- FTA is still available **through the summer of 2026** for eligible returns. However, during the transition, eligible taxpayers may still receive penalties if the IRS hasn’t yet applied AEP standards.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- For returns with original due dates **on or after January 1, 2027**, FTA will be phased out completely.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## What taxpayers should do
- **No action required**: If you meet eligibility, AEP will be applied automatically during processing and you'll receive a notice confirming relief.([irs.gov](https://www.irs.gov/newsroom/automatic-exemption-from-penalty-what-taxpayers-should-know?utm_source=openai))
- **If AEP is not applied** but you believe you qualified: You can still request relief under *First Time Abate* for applicable returns or seek penalty relief based on reasonable cause.([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- **Maintain documentation**: To ensure eligibility, keep records showing timely filing, payments, and deposits for the past 3 years or 12 quarters. Even a single late event may disqualify AEP for that period.
- **Plan ahead**: Align your tax operations — especially for quarterly filers — with the eligibility framework to ensure you benefit from AEP going forward.
## Why it matters
Implementing AEP offers several benefits:
- Less administrative burden: automatic relief removes the need to file a specific request or remember to claim FTA.
- Consistency and fairness: treats similarly compliant taxpayers equally without procedural hurdles.
- Encouragement for small businesses and self‐employed individuals: provides predictability and can support cash flow management by reducing penalty risks.
Understanding these changes equips taxpayers and tax professionals to capitalize on new protections, avoid surprises, and ensure compliance aligns with the eligibility framework. With the full transition to AEP by **January 1, 2027**, now is the time to review and ensure your records and compliance history are in order.