The Internal Revenue Service has announced a major change to its penalty relief program. Starting in summer 2026, eligible taxpayers with a history of filing and paying taxes on time may automatically receive relief from certain penalties without having to request it. The new Automatic Exemption from Penalty (AEP) program will ultimately replace the long-time First Time Abate (FTA) process and streamline how relief is granted.
What is the new automatic exemption from penalty (AEP) program?
The IRS’s new program aims to reduce administrative burden for taxpayers who have historically filed and paid their tax bills on time. Under AEP, penalty relief is automatically applied during return processing, without the taxpayer needing to apply for relief or make a formal request. Automatic Exemption from Penalty applies to original returns beginning with tax year 2025 and 2026 quarterly returns. It will also replace the First-Time Abate relief program that allowed eligible taxpayers with a history of compliance to request the removal of certain penalties. The AEP will replace FTA for eligible returns with original due dates on or after Jan. 1, 2027, and will apply to future tax periods.
Why the IRS made this change
The IRS listed several reasons for making this shift. In its announcement, IRS CEO Frank J. Bisignano said the change was meant to make the penalty relief process “simpler and more consistent.” The change not only promotes fairness in offering penalty relief but also eliminates the taxpayer’s burden of filing a request and cuts down on the time spent by IRS agents on a request that is often granted.
Which penalties can AEP automatically waive?
Eligible taxpayers — those who have a history of filing returns on time and paying any tax due for the previous three years, or 12 consecutive quarters for quarterly returns — can get automatic relief from the following:
- Failure-to-file penalties: This penalty applies when you don’t file your tax return by the due date, including extensions. The amount depends on your return type.
- Failure-to-pay penalties: This penalty happens when you don’t pay the tax when it is due, and it’s usually a percentage of the amount you didn’t pay.
- Failure-to-deposit penalties: This penalty commonly affects businesses required to make employment tax deposits. It occurs when employers don’t make employment tax deposits on time, in the right amount, or in the correct way.
Which tax returns are not eligible for AEP?
AEP is designed to cover many common tax filings, but it doesn’t apply to every type of return. In general, information returns and returns tied to specific transactions or one-time events are not eligible for automatic relief.
That means filings such as estate tax returns, gift tax returns, and other infrequently filed returns are not eligible for the program. For example, Form 706 and Form 709 generally are not eligible for AEP.
Another option: reasonable cause relief
Taxpayers who don’t receive this automatic penalty relief can still request it if they have a reasonable cause. The IRS reviews those requests on a case-by-case basis and notifies taxpayers if they are approved. Common reasons for this relief include natural disasters and serious illnesses.
Important AEP considerations
While you may qualify for automatic penalty relief, that doesn’t mean you don’t owe taxes. You must still pay what you owe, and interest also generally continues to be accrued to unpaid balances.
For high-income taxpayers with more complex filings, AEP can provide welcome relief in some situations, but it is still important to understand which penalties and returns qualify before assuming the IRS will waive a penalty automatically.
Contact your Mowery & Schoenfeld tax advisor if you have questions about how AEP might apply to you.