IRS Announces Automatic Penalty Relief for Eligible Taxpayers

Posted on August 05, 2026

The IRS has announced a new administrative penalty relief process designed to make relief more automatic for taxpayers with a history of filing and paying on time. The new process, called the Automatic Exemption from Penalty (AEP), will allow the IRS to automatically prevent certain penalties from being assessed when eligible taxpayers make a one-time mistake.

For many years, the IRS has offered First Time Abate (FTA) relief, which allowed taxpayers with a clean compliance history to request relief from certain penalties. However, FTA generally requires taxpayers, or their tax professionals, to identify the issue and affirmatively request penalty relief. Under the new process, eligible taxpayers will no longer need to separately request relief in many situations. Instead, in certain circumstances, the IRS will apply it automatically during return processing.

How AEP Works

AEP prevents certain penalties from being assessed, but taxpayers are still responsible for paying any underlying tax, interest, and any penalties that are not eligible for relief. Generally, taxpayers may qualify if IRS records show they filed required returns and paid taxes on time for the three preceding years, or 12 consecutive quarters for quarterly filers.

Relief can apply to three common penalty categories: failure to file, failure to pay, and failure to deposit. The IRS also indicates that AEP may apply across several frequently filed individual and business returns, including Forms 1040, 1065, 1120, and more, although eligibility depends on the return, tax period, penalty type, and the taxpayer’s compliance history.

Certain returns generally are not eligible, including information returns and returns filed only for specific transactions or infrequent events. The IRS has provided examples such as Form 706 (estate tax returns) and Form 709 (gift tax returns).

The IRS expects AEP to begin in summer 2026, although an exact date has yet to be announced at the time of this writing. It will apply to eligible original returns beginning with tax year 2025 returns and 2026 quarterly returns. The plan is for FTA to be phased out, and AEP will replace FTA for eligible returns with original due dates on or after January 1, 2027. Importantly, a taxpayer who believes they qualify may still need to contact the IRS and request FTA while the transition rules are in effect.

FAQ

Q: What is the Automatic Exemption from Penalty (AEP)?

AEP is a new IRS process that provides automatic relief from certain penalties for eligible taxpayers. Unlike the current First Time Abate process, taxpayers generally will not need to request relief if they qualify. The IRS is expected to apply AEP during original-return processing and issue a notice confirming the relief.

Q: When does AEP begin?

Systemic AEP relief is expected to begin in summer 2026. During the transition period, taxpayers may still need to request First Time Abate for certain penalty notices related to tax year 2025 or 2026 returns; best practice is likely to assume a request is necessary.  AEP is expected to fully replace FTA for eligible returns with original due dates on or after January 1, 2027.

Q: Who is eligible for AEP?

Eligibility generally depends on a clean compliance history for the same return type. Based on the current guidance, a taxpayer must have:

• Timely filed the same return type for the prior three years; and
  Timely paid any tax due for those prior years.
   

For quarterly filers, the lookback period is 12 consecutive quarters.

For businesses seeking relief from failure-to-deposit penalties, additional limitations apply. The failure-to-deposit penalty generally must not have been waived four or more times during the prior three years or 12 quarters, and the taxpayer must not have been charged a failure-to-deposit penalty for EFTPS avoidance.

Q: What penalties are covered by AEP?

AEP is expected to cover certain penalties, including:

• Failure to file penalties;
  Failure to pay penalties; and
  Failure to deposit penalties for eligible business taxpayers.
   

The cited penalty provisions include Sections 6651, 6656, 6698(a)(1), and 6699(a)(1), depending on the type of return and penalty involved.

Q: Which return series are expected to be eligible?

Eligible return series include:

• Form 1040;
• Form 1065;
• Form 1120;
• Forms 940, 941, 943, 944, and 945; and
• Form CT-1.
   

Q: What is not covered by AEP?

AEP is not expected to apply to all filings or all penalties. Exclusions currently include:

• Information returns;
• Event-based returns, such as Forms 706 and 709;
• Information reporting that depends on another filing;
• The Daily Delinquency Penalty; and
• Tax, interest, or penalties that are not otherwise eligible for AEP relief.
   

AEP does not eliminate the underlying tax owed or any applicable interest or penalties outside the scope of the automatic relief.

Q: How is AEP different from First Time Abate?

The key difference is timing. Under the current FTA process, the IRS generally assesses the penalty first, and the taxpayer must later request abatement if eligible. Interest may accrue while the penalty remains assessed.

Under AEP, eligible penalties are not expected to be assessed in the first place. Instead, the IRS applies the relief automatically during original-return processing and sends a confirming notice.

[1] See “Eligible taxpayers to get automatic IRS penalty relief” by Martha Waggoner at https://www.journalofaccountancy.com/news/2026/jul/eligible-taxpayers-to-get-automatic-irs-penalty-relief/#:~:text=Collins%20said%20the%20impact%20of,would%20have%20received%20penalty%20relief.%E2%80%9D.