Tax Planning
Tax Planning: How to Leverage the U.S. Automatic Exemption from Penalty (AEP)
The IRS is replacing First Time Abate with an automatic penalty relief system for taxpayers with good compliance history. Here's how to benefit.
By NomadicTax Research Team • 5-8 min read • July 9, 2026
## What is the Automatic Exemption from Penalty (AEP)?
Starting summer 2026, the IRS is implementing **AEP** to automatically waive certain penalties for taxpayers who meet specific compliance requirements. It's designed to streamline relief for those who file and pay on time, reducing the need for formal requests. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
### Key Features
- Applies to **failure-to-file, failure-to-pay, and failure-to-deposit** penalties for *eligible original returns* for tax year **2025**, **2026 quarterly returns**, and future tax periods. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- Taxpayers qualify if they've filed timely and paid any tax due in **the three prior years** (or **twelve consecutive quarters** for quarterly returns). ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- No action required: if eligible, the relief is **automatically** applied, and a confirmation notice will be issued. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
- First Time Abate (FTA) is being phased out. By **January 1, 2027**, AEP will fully replace FTA for returns with original due dates on or after that date. ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))
## Who is Eligible – Who is Not
| Eligible | Not Eligible |
|---|---|
| Taxpayers with a perfect compliance track record over the required past years/quarters | Those with recent late filings or non-compliance issues |
| Returns for regular obligations (income, payroll, deposits) | Specialty returns like **Form 706** (Estate Tax), **Form 709** (Gift Tax), or unique transactions only filed occasionally ([irs.gov](https://www.irs.gov/newsroom/irs-simplifies-penalty-relief-introduces-automatic-process-for-eligible-taxpayers?utm_source=openai))|
## Example Scenarios
- *Scenario A*: A sole proprietor filed her tax returns on time for 2022, 2023, and 2024, and paid all taxes owed. During 2025/2026, she misses a quarterly estimated payment. Under AEP, the failure-to-pay penalty for that quarter may be waived automatically.
- *Scenario B*: An individual files all returns timely but forgets to file **Form 709** (Gift Tax Return) when making taxable gifts. Because Form 709 is generally excluded from AEP, she can’t rely on this for penalty relief—must use reasonable-cause procedures.
## Actionable Insights & Planning Steps
1. **Check your compliance history** now. If you’ve been filing and paying on time, you likely qualify—document your records.
2. **Adjust upcoming filings**—don’t skip payments or miss deadlines. Avoid letting your eligibility lapse.
3. For those currently relying on FTA or who are borderline eligible, consider using FTA during the transition if necessary. But plan to rely on AEP beginning 2027.
4. If you receive a penalty notice and believe you qualify for AEP (or FTA during transition), respond—especially before the relief kicks in automatically.
5. Use AEP eligibility as a selling point or reassurance if advising clients—good compliance will now yield automatic benefits.
## Why It Matters
- **Reduced burden**: eliminates paperwork and delays for many taxpayers.
- **Fairness and consistency**: recognizes and rewards consistent compliance.
- **Encourages voluntary compliance**, improving revenue collection and taxpayer satisfaction.
*NomadicTax Research Team suggests tracking your eligibility closely—with AEP, structured compliance history now pays off in more ways than one.*