What the New Program Means for You
On July 8, 2026, the IRS announced a significant change to how it handles certain late-filing and late-payment penalties. The new program, called the Automatic Exemption from Penalty (AEP), will replace the long-standing First Time Abate (FTA) process. It could mean fewer headaches and phone calls to the IRS for taxpayers with a solid compliance track record.
What is AEP?
Previously, qualifying taxpayers who missed a filing or payment deadline for the first time could request “First Time Abate” relief by sending a written statement or Form 843 (Claim for Refund and Request for Abatement) to the IRS.
Instead of requiring a request, the IRS will automatically identify taxpayers with a strong compliance history and waive certain penalties as part of normal return processing, without a phone call, letter, or form.
Penalty types eligible for AEP
- Failure-to-file penalties
- Failure-to-pay penalties
- Failure-to-deposit penalties (for employment tax filers)
Who qualifies for AEP
Taxpayers who filed on time and paid any tax due for the prior three years (or 12 consecutive quarters for quarterly filers like Form 941). Business filers also need a clean recent history of failure-to-deposit penalty waivers. Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause.
When does AEP take effect?
AEP begins phasing in summer 2026 for 2025 tax year returns and 2026 quarterly returns. It becomes the exclusive relief mechanism for eligible returns with original due dates on or after January 1, 2027, when it fully replaces FTA.
Benefits of AEP
- Relief without the paperwork. If you qualify, the IRS will apply the exemption automatically and send a confirmation notice. You won’t need to call, write a letter, or file Form 843.
- More taxpayers receive the relief they’ve earned. The National Taxpayer Advocate Service estimates that AEP could extend relief to roughly 1.5 million taxpayers per year, compared to about 220,000 who received FTA relief through the old manual process.
- No accrued penalty to unwind. Under the old FTA process, the penalty was often assessed first and removed later, sometimes after interest had already begun accruing. Under AEP, the penalty generally isn’t assessed in the first place.
Potential downsides
While AEP is a welcome simplification, it’s not a cure-all, and a few things are worth keeping in mind:
- AEP doesn’t apply to everything. The program does not cover information returns or returns tied to one-time or infrequent events, such as Form 706 (U.S. Estate Tax Return) or Form 709 (U.S. Gift Tax Return).
- The eligibility bar is strict. A single late filing or late payment in the prior three years (or 12 quarters) can disqualify you.
- The roll out isn’t seamless. Because AEP is being phased in gradually through the summer of 2026, some taxpayers who qualify may still receive a penalty notice before the system catches up. If that happens, don’t assume the notice is final. It may mean AEP hasn’t been applied yet, and a call to the IRS or your advisor to request FTA may still be necessary.
- AEP provides administrative rather than statutory relief. Because AEP is automatic, it may be applied before the IRS considers whether the taxpayer qualifies for reasonable cause relief. Therefore, a taxpayer who faces a compliance issue in a subsequent year and does not qualify for reasonable cause relief may also be ineligible for AEP because they no longer have a clean compliance record.
Bottom line
AEP is good news for taxpayers with a strong filing and payment history. But “automatic” doesn’t mean automatic for everyone, and the transition period may create some short-term confusion. If you receive a penalty notice from the IRS, please forward it to our team before responding. We’re closely monitoring this rollout and are here to ensure you receive the penalty relief you’re entitled to.
Contact your tax advisor if you have questions about how AEP might affect your specific situation.