Good, clear-cut news from the IRS is rare, but that’s what arrived on July 8, 2026, when the agency announced the IRS Automatic Exemption from Penalty. Known as AEP, the program is built to stop certain late filing and late payment penalties from ever being charged in the first place, instead of making taxpayers ask for relief after the fact.
AEP is replacing First Time Abate, the program many taxpayers have relied on for years, the one where you had to ask the IRS for relief yourself. If you’ve generally filed and paid on time but slipped up once, this change could mean the difference between a penalty notice landing in your mailbox and no penalty ever showing up at all. Here’s what the new automatic penalty abatement process covers, who qualifies, and how it’s different from the program it’s replacing.
What Is the IRS Automatic Exemption from Penalty?
The Automatic Exemption from Penalty is an automatic IRS process. When your return is processed, the IRS checks your filing history and stops certain penalties from ever being charged if you qualify. There’s no form to file and no call to make. If the IRS decides you’re eligible, the exemption is applied automatically, and they’ll mail you a notice confirming the penalty wasn’t charged because of your history of filing and paying on time.
This is a real shift in how IRS penalty relief 2026 works. Under the old system, the IRS charged the penalty first and left it up to you to notice it, figure out your options, and ask for it to be removed. Under AEP, if you qualify, you never see the penalty at all.
Which Penalties Are Covered, and Who Qualifies
AEP can stop three types of penalties from ever being charged:
- Failure to file, for missing a return deadline (IRS failure-to-file penalty relief)
- Failure to pay, for not paying the full tax due on time (IRS failure-to-pay penalty relief)
- Failure to deposit, for businesses that miss required payroll tax deposits.
To qualify, you generally need a clean track record: the same return filed on time for the three years before, or 12 straight on-time quarters if you’re a quarterly filer, like a business filing Form 941. Eligible returns include Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. It doesn’t currently cover Form 1120-S for S corporations, information returns, or forms only filed for one-time events, like Form 706 estate returns or Form 709 gift tax returns.
If you’re already keeping current on a balance through an Installment Agreement, that alone won’t disqualify you. AEP looks at your filing and payment history over the qualifying period, not whether you’ve ever needed a payment plan.
What Happens If You Already Received a Penalty Notice
AEP isn’t switching on all at once. It’s being phased in. Phase one covers eligible 2025 tax year returns and 2026 quarterly returns processed after the system went live in July 2026. Since that rollout takes time, some taxpayers who qualify may still get a penalty notice for a 2025 or 2026 return that was processed before AEP kicked in.
If that happens to you, the fix is simple. Contact the IRS and ask for relief under the existing First Time Penalty Abatement process, which is still available during the transition. AEP will fully take over from that process for original returns due on or after January 1, 2027.
What AEP Does Not Do
AEP is narrower than it might sound, so it’s worth being clear about its limits before you assume a penalty problem is fully resolved.
- It does not cancel the tax you owe. Any underlying tax balance remains due.
- It does not stop interest from accruing on an unpaid balance.
- It does not cover every penalty. Accuracy-related penalties, estimated tax penalties, and civil fraud penalties fall outside AEP entirely.
If you don’t qualify for AEP, whether it’s a gap in your filing history or a penalty type it doesn’t cover, penalty abatement based on reasonable cause is still available. That route needs a written explanation and supporting documents, and the IRS reviews each request on its own rather than granting it automatically.
How AEP Is Different From First Time Penalty Abatement
AEP and the First Time Penalty Abatement changes share the same basic idea, that a taxpayer with a strong track record shouldn’t be penalized for one misstep. Here’s how the two actually work differently.
First Time Penalty Abatement: the IRS charges the penalty first, then you have to call, write, or respond to a notice to ask for it to be removed.
Automatic Exemption from Penalty: the IRS checks your eligibility while processing the return, and if you qualify, the penalty is never charged in the first place.
Both programs work off the same three-year or 12-quarter clean history, and both cover the same three penalty types. The real difference is that AEP takes the guesswork off your plate. You don’t have to notice the penalty or know to ask for relief, which matters most for taxpayers who might not otherwise realize they qualify.
Frequently Asked Questions
Does AEP apply to state tax penalties?
No. AEP is a federal IRS program, so it only applies to penalties on federal returns. State tax agencies, including the Illinois Department of Revenue, set their own penalty relief rules and aren’t affected by this change.
What if AEP applies to me, but I already paid a penalty before the rollout?
If a penalty was charged and paid before your return was processed under AEP, contact the IRS directly. Their guidance says taxpayers who believe they qualify but were still charged should use the existing First Time Abate request process during the transition, rather than a separate AEP appeal.
Can a business with seasonal or irregular quarterly filings still qualify?
Only if the 12 quarters right before the period in question were all filed and paid on time. One late quarter in that window resets the clock, even if the business has a strong record otherwise.
Could AEP’s rules change again before it fully replaces First Time Abate?
It’s possible. AEP is rolling out in phases through 2027, and the IRS has said it may expand eligibility to more return types over time. If your situation is borderline, confirm the current rules before assuming a penalty will or won’t apply.
Working With a Tax Professional Who Tracks These Changes
Programs like AEP are a real improvement, but they’re not a substitute for professional guidance, especially if your filing history has any gaps, you’re managing tax debt across multiple years, or a penalty notice doesn’t match what you expected. Our enrolled agents at Andrin Tax Relief stay on top of IRS changes like this one and can review your account to confirm whether AEP applies to you, whether a First Time Abate request still makes sense during the transition, or whether reasonable cause relief is the better path.
Ready to find out where you stand? Contact our team today for a review of your account and your options.
