The IRS's New Automatic Exemption from Penalty (AEP) Program

On July 8, 2026, the IRS announced a new way it will handle penalty relief for taxpayers with a clean compliance record: the Automatic Exemption from Penalty, or AEP. Instead of requiring a phone call, a letter, or a formal request, the IRS will now grant this relief on its own — no action needed from the taxpayer.

It's a genuinely welcome change for anyone who's dealt with the old process, but it comes with real limits worth understanding before you assume you're covered.

What AEP replaces

For years, the main way compliant taxpayers got a one-time penalty waived was First Time Abate (FTA) — a process that required contacting the IRS and formally requesting relief, even when the taxpayer's compliance history made approval close to automatic. AEP flips that dynamic: when the IRS's own systems identify an eligible taxpayer during return processing, the penalty is simply never assessed. A notice follows confirming the relief was granted.

FTA isn't gone yet. During the transition, it still applies to:

• Eligible 2024 tax year returns
• Eligible 2025 quarterly returns
• Eligible 2025 tax year returns and 2026 quarterly returns processed before AEP takes effect

For those returns, taxpayers still need to contact the IRS and request FTA directly — it won't happen automatically. But for original returns with due dates on or after January 1, 2027, FTA goes away entirely and AEP becomes the only path for this kind of relief.

Which penalties AEP covers

AEP can prevent the assessment of three penalty types:

• Failure to file — a return isn't submitted by its due date
• Failure to pay — tax owed isn't paid by its due date
• Failure to deposit — required tax deposits (for example, payroll tax deposits) aren't made on time

It does not cover everything. AEP generally does not apply to daily delinquency penalties, accuracy-related penalties, information return penalties, or other penalty types outside the three listed above. So even a taxpayer who qualifies for AEP on a late-filing penalty could still be assessed an accuracy-related penalty on the same return if the facts warrant it.

Who qualifies

The core eligibility test is a track record: three prior years of timely compliance for annual returns, or 12 consecutive quarters of timely compliance for quarterly returns. Taxpayers who meet that bar and have a one-time lapse — filing, paying, or depositing late — are the intended beneficiaries.

AEP applies to eligible original returns starting with the 2025 tax year and 2026 quarterly returns, and to future tax periods going forward.

Importantly, AEP doesn't erase the underlying obligation. Taxpayers still owe any tax and interest due, and still need to file, pay, and deposit on time going forward — AEP only prevents the specified penalty from attaching when the eligibility criteria are met.

How it works in practice

There's no form, application, or separate request. If the IRS's systems determine a taxpayer qualifies during original return processing, AEP is applied automatically and the IRS sends a notice explaining that the penalty wasn't assessed because of the taxpayer's history of timely compliance. If a taxpayer doesn't meet the requirements — for instance, they don't have the three-year or 12-quarter track record — the penalty can still be assessed in the normal way.

What if you don't qualify?

Reasonable cause relief remains available for penalties tied to circumstances beyond a taxpayer's control — a serious illness, a natural disaster, or other legitimate reasons a return or payment was late. Taxpayers can also appeal an adverse penalty decision through the normal channels.

One critique worth noting: National Taxpayer Advocate Erin Collins has raised concern about how AEP interacts with reasonable cause relief. According to her office, IRS leadership had reportedly agreed on an approach that would let taxpayers access both forms of relief as needed, but the implementation the IRS ultimately adopted instead has administrative relief under AEP displace a taxpayer's reasonable cause claim, rather than preserving it alongside AEP. If that account is accurate, a taxpayer who receives AEP relief automatically may not later be able to invoke reasonable cause for that same penalty — even if they'd have preferred to save that option for a different circumstance. This is the Taxpayer Advocate's characterization of the rollout, not the IRS's own description of how the program works, and it's an area worth watching as AEP rolls out more broadly.

The bottom line

AEP is a meaningful process improvement: taxpayers who've done everything right for years no longer have to ask permission to get a penalty most of them would have received anyway. But it's not a blanket exemption — it applies to specific penalties, requires a real compliance track record, and doesn't cover accuracy-related or information-return penalties. If you receive a penalty notice and believe your history should have qualified you for relief, it's worth reviewing whether AEP applied automatically, whether FTA is still the applicable path during the transition period, or whether a reasonable cause request is the better route.

This article is provided for general informational purposes only and does not constitute tax, accounting, or legal advice. Tax rules change and apply differently to each situation — please consult a qualified advisor before acting on anything discussed here.