For years, taxpayers who normally filed and paid on time could sometimes get certain IRS penalties removed through a program called First Time Abate. There was one catch: you generally had to know the program existed and ask the IRS for relief.
That is changing. In July 2026, the IRS introduced the Automatic Exemption from Penalty, or AEP. Instead of waiting for an eligible taxpayer to request relief, the IRS can now identify qualifying taxpayers during return processing and prevent certain penalties from being assessed in the first place.
For taxpayers with a strong compliance history who miss a filing, payment, or deposit deadline once, that could mean less paperwork and, in some cases, no penalty assessment at all. But AEP does not make tax deadlines optional. It does not cover every penalty, and it does not eliminate the underlying tax or interest you may owe.
What Is the Automatic Exemption from Penalty?
Automatic Exemption from Penalty is an IRS administrative relief program designed for taxpayers who generally have a history of filing and paying their taxes on time.
If you qualify, the IRS reviews your compliance history while processing an eligible original return. When the requirements are met, certain penalties are not assessed.
You do not file a special AEP form. You do not need to call the IRS in advance. You do not need to send a letter asking for the relief. If AEP is applied, the IRS will send you a notice explaining that the penalty was not assessed because of your prior compliance history.
That is a meaningful change from First Time Abate, where the penalty was generally assessed first and an eligible taxpayer then had to request that it be removed.
Which IRS Penalties Can AEP Cover?
AEP can apply to three of the most common federal tax penalties:
- Failure to file
- Failure to pay
- Failure to deposit
That can make the program relevant to individuals, businesses, and employers. However, AEP does not provide blanket protection from IRS penalties. Accuracy-related penalties, information-return penalties, daily delinquency penalties, and other penalties outside the program can still apply.
The relief also does not eliminate unpaid tax or the interest that accrues on it.
Who Qualifies for Automatic Penalty Relief?
The key requirement is your prior compliance history. For annual return filers, the IRS generally looks at the previous three tax years. For quarterly filers, it generally looks at the previous 12 consecutive quarters.
During that period, the taxpayer must have a history of timely filing and timely payment of tax due.
AEP applies only to eligible return types. IRS guidance includes the Form 1040, Form 1065, and Form 1120 return series, along with certain employment tax returns such as Forms 940, 941, 943, 944, and 945 and Form CT-1.
There are returns that do not qualify. Information returns and certain returns filed because of infrequent transactions, such as estate and gift tax returns, generally do not receive AEP treatment.
When Did AEP Start?
The transition began during the summer of 2026. AEP can apply to eligible original returns beginning with 2025 annual tax returns and 2026 quarterly returns, as well as future eligible periods.
The IRS is phasing out First Time Abate during this transition. For eligible original returns with due dates on or after January 1, 2027, AEP is expected to replace First Time Abate.
That creates a transition period in 2026 where the correct relief process can depend on the tax period and when the IRS processed the return.
What Happens to First Time Abate?
First Time Abate has not disappeared immediately. During the 2026 transition, FTA can still apply to certain earlier returns and to some 2025 annual or 2026 quarterly returns that were processed before AEP became available.
The important difference is that FTA must generally be requested. AEP is automatic.
If you receive an IRS penalty notice during the transition and believe your compliance history should qualify you for relief, do not assume the IRS will automatically correct the notice later. Review the notice and determine which relief program applies to the tax period involved.
What If the IRS Assesses a Penalty Even Though You Think You Qualify?
Receiving a penalty notice does not necessarily mean the IRS got the final answer right. AEP is applied during original return processing. If a penalty was assessed and you believe your return should have qualified for automatic relief, the IRS instructs taxpayers to contact the agency.
The first step is to confirm what the penalty is actually for. Look at the notice, the tax period, the return involved, and the reason the IRS says the penalty was assessed. Then compare that information with your filing and payment history.
This is also where good records become important. Payment confirmations, filing records, and prior-year account information can help establish what happened. For businesses with payroll deposits or multiple tax filings, the underlying compliance history can be more complicated than it first appears.
What If You Do Not Qualify for AEP?
AEP is not the only way an IRS penalty can potentially be reduced or removed. The IRS also provides penalty relief when a taxpayer can establish reasonable cause. Reasonable cause is based on the particular facts and circumstances surrounding the failure to file, pay, or meet another tax obligation.
A serious illness, natural disaster, or circumstances outside the taxpayer’s control may be relevant, but there is no single explanation that automatically guarantees relief. The IRS looks at what happened, what steps the taxpayer took to comply, and whether the taxpayer acted responsibly once the problem was discovered.
Depending on the penalty, a taxpayer may be able to request relief by contacting the IRS or by submitting Form 843, Claim for Refund and Request for Abatement.
AEP Does Not Mean You Should Intentionally File or Pay Late
Automatic penalty relief is meant to help taxpayers who normally comply but have an occasional problem. It should not be viewed as a free late-filing year.
Filing late can create consequences beyond the specific penalties covered by AEP. You may still owe interest, other penalties could apply, and repeated compliance problems can prevent you from qualifying for future relief.
For businesses, late tax filings can also create problems with lenders, investors, state tax agencies, and other parties that rely on current financial and tax information. The best strategy is still to file and pay on time whenever possible.
What Business Owners Should Do in 2026
The biggest practical change is that business owners should pay closer attention to IRS penalty notices during the transition from First Time Abate to AEP.
Do not immediately pay a penalty simply because it appears on an IRS notice. At the same time, do not ignore the notice because you think automatic relief should eventually take care of it.
First determine whether the penalty is correct. Then determine whether AEP, First Time Abate, reasonable cause, or another form of relief may apply. For businesses with several entities, payroll filings, or a complicated filing history, that analysis may require reviewing multiple years or quarters of IRS account information.
Archer Lewis Can Help With IRS Penalty Notices
An IRS penalty notice is a starting point, not necessarily the final amount you have to pay.
Archer Lewis tax professionals can review the notice, examine the underlying filing and payment history, determine whether available penalty relief may apply, and help communicate with the IRS. Our Tax Authority Representation team works with taxpayers on IRS notices, audits, appeals, and collection matters.
If you received an IRS penalty notice and are unsure whether AEP, First Time Abate, or another form of relief applies, getting the notice reviewed before responding can help prevent an unnecessary payment or a missed response deadline.
Frequently Asked Questions About IRS Automatic Penalty Relief
Does AEP automatically remove IRS penalties?
AEP prevents certain eligible penalties from being assessed during original return processing. It does not apply to every IRS penalty or every return.
Do I need to apply for AEP?
No. If you qualify, the IRS applies AEP automatically while processing the eligible original return.
How many years of good tax history do I need?
Annual filers generally need three prior years of timely compliance. Quarterly filers generally need 12 consecutive prior quarters.
Does AEP remove the tax I owe?
No. You still owe the underlying tax and applicable interest, along with any penalties that are not covered by AEP.
Can I still request penalty relief if I do not qualify for AEP?
Possibly. Reasonable-cause relief and other penalty relief provisions may still be available depending on the circumstances.
This article is for general informational purposes and is not a substitute for tax advice based on your specific circumstances.