IRS Automatic Penalty Relief: AEP Replaces First Time Abate
For years, one of the most frustrating parts of tax practice was watching an otherwise perfectly compliant client receive a penalty notice — and knowing that the relief they qualified for existed only in a technical corner of the Internal Revenue Manual. If the client did not know to ask (and most didn’t), they simply paid. That changes with the IRS’s new automatic penalty relief program, announced in IR-2026-83 on July 8, 2026.
At SW Accounting & Consulting Corp, we handle IRS notices for individual taxpayers and Los Angeles small businesses every filing season, and First Time Abate (FTA) has always been one of the highest-leverage tools in the toolbox — when the client remembered to mention the notice. Here is what the new Automatic Exemption from Penalty (AEP) actually changes, who qualifies, what it does not cover, and what to do during the transition.
What is the IRS’s new automatic penalty relief program? 🧾
The Automatic Exemption from Penalty (AEP) is a systemic administrative-relief program that waives certain civil penalties for taxpayers with a three-year on-time compliance history — without the taxpayer having to request it.
Under AEP, when an eligible return posts to IRS systems, the service checks the taxpayer’s recent compliance record. If the record is clean, the IRS simply does not assess three of the most common penalties — failure to file, failure to pay, and failure to deposit — and issues a notice confirming that relief was granted. The taxpayer does not file a form, does not call, and does not need a CPA to know a manual-relief code exists.
The IRS frames the change as part of its broader push toward fairness and consistency: taxpayers with a strong compliance history should not have to make a formal request for relief that is “routinely granted.” Program rollout is scheduled to begin in summer 2026 and apply to eligible original returns starting with tax year 2025 and 2026 quarterly returns.
Who qualifies for AEP? 🧑💼
Taxpayers qualify if they have a history of timely filing the return and paying any tax due for the prior three years — or twelve consecutive quarters for quarterly returns.
The eligibility rules mirror the compliance-history test that has always been the heart of First Time Abate, but the IRS now applies the test itself during processing. In practical terms:
- Annual returns: the prior three tax years must be clean — filed on time and any tax due paid on time.
- Quarterly returns (e.g., Form 941 payroll): the prior twelve consecutive quarters must be clean.
- Eligible periods: AEP applies to eligible original returns for tax year 2025 and 2026 quarterly returns, and to future tax periods.
- Not every return qualifies. Information returns and returns filed only in response to specific transactions or infrequent events — such as Form 706 (U.S. Estate Tax Return) or Form 709 (Gift Tax Return) — generally are not eligible.
What does AEP change versus First Time Abate? 🔄
The biggest change is administrative: relief moves from a manual, request-driven process to an automatic, systemic one — and the scale of who actually benefits should jump dramatically.
First Time Abate was never a statute or a regulation. It was administrative guidance buried inside the Internal Revenue Manual, so it worked only if a taxpayer, CPA, or attorney knew to ask for it. According to the National Taxpayer Advocate’s July 2026 NTA blog post, roughly 220,000 taxpayers received FTA relief through the manual process in fiscal year 2025. If AEP had been in place during that same period, an estimated 1.5 million-plus taxpayers would have qualified — a nearly seven-fold gap that reflected pure lack of awareness, not eligibility.
AEP does not eliminate FTA immediately. Instead:
- The IRS is phasing out FTA and transitioning to AEP during summer 2026.
- During the transition, some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns. If that happens, they may contact the IRS to request First Time Abate manually.
- AEP will fully replace FTA for eligible returns with original due dates on or after January 1, 2027.
What if I don’t qualify for automatic penalty relief? 🛟
Reasonable-cause relief remains available on request — and the underlying tax and interest are still owed even when AEP applies.
Two important limits are easy to miss:
- Tax and interest are unaffected. AEP prevents the assessment of certain penalties — it does not waive the tax owed or the interest that continues to accrue on that tax. Pay the balance as soon as possible even if the penalty is waived.
- Reasonable cause is still on the table. Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause — illness, natural disaster, records destroyed, and so on. The IRS reviews these requests case by case. See the IRS penalty relief for reasonable cause page for eligibility and documentation.
- Other penalties are not eligible. Accuracy-related, fraud, and information-return penalties fall outside AEP and generally outside FTA as well.
FTA vs. AEP at a glance 📊
| Feature | First Time Abate (FTA) | Automatic Exemption from Penalty (AEP) |
|---|---|---|
| How relief is triggered | Taxpayer or representative requests it | Applied automatically during return processing |
| Notice the taxpayer receives | Response to a request | Notice confirming relief was granted |
| Eligibility window | 3 clean prior years / 12 clean prior quarters | Same 3 years / 12 quarters |
| Penalties covered | Failure to file, pay, and deposit | Same three penalty types |
| Estimated annual reach | ~220,000 taxpayers (FY 2025) | 1.5 million+ (TAS estimate) |
| Fully replaces FTA | — | Yes, for returns due on or after Jan 1, 2027 |
What should taxpayers and CPAs do right now? ✅
Do not stop asking for First Time Abate during the transition — and use AEP as a nudge to formalize compliance-history tracking for every client.
- Track compliance history proactively. Under AEP, a clean three-year history is worth real money. Late filing or late payment in year one now costs relief in years two, three, and four.
- Still request FTA during the transition. If a client receives a penalty notice for tax year 2025 or a 2026 quarter, do not assume AEP was skipped in error. Call the IRS and request FTA manually — it is still available.
- Do not let interest run. AEP waives the penalty, not the tax. Pay the balance or set up an installment agreement quickly.
- Reserve reasonable cause for the hard cases. If the compliance-history test fails but there is a real reason — hospitalization, disaster, records loss — file a reasonable-cause request instead.
- Update your notice-response templates. New “relief-granted” IRS notices will start arriving. Have staff recognize them and file them cleanly rather than treating them as new liabilities.
📌 Key Takeaways
- AEP begins summer 2026 and applies to tax year 2025 and 2026 quarterly returns going forward.
- Waives failure-to-file, failure-to-pay, and failure-to-deposit penalties.
- Eligibility: 3 clean prior years (or 12 clean prior quarters).
- FTA is phased out and fully replaced for returns due on or after January 1, 2027.
- The tax and interest still have to be paid — AEP does not forgive them.
Frequently Asked Questions ❓
Q. What is the IRS’s new automatic penalty relief program?
It is the Automatic Exemption from Penalty (AEP), a systemic program in which the IRS waives failure-to-file, failure-to-pay, and failure-to-deposit penalties for eligible taxpayers during return processing — without requiring a request.
Q. When does AEP start?
The IRS expects AEP to begin in summer 2026. It applies to eligible original returns starting with tax year 2025 and 2026 quarterly returns, and to future tax periods. AEP fully replaces First Time Abate for eligible returns with original due dates on or after January 1, 2027.
Q. Who qualifies for AEP?
Taxpayers who filed the return on time and paid any tax due on time for the prior three years — or the prior twelve consecutive quarters for quarterly returns. Information returns and one-off filings such as Form 706 and Form 709 generally are not eligible.
Q. Do I still have to pay the tax if AEP waives the penalty?
Yes. AEP prevents the assessment of certain penalties, but the underlying tax and interest on that tax must still be paid, along with any penalties not eligible for relief.
Q. What if I get a penalty notice during the transition even though I qualify?
Some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns during the transition. If that happens, contact the IRS and request First Time Abate manually — it remains available during the phase-out.
Q. What if I don’t qualify for AEP?
You may still request penalty relief based on reasonable cause — for example, serious illness, natural disaster, or loss of records. The IRS reviews these requests on a case-by-case basis. See the IRS penalty relief for reasonable cause page for details.
If you have already received an IRS penalty notice and are not sure whether AEP, FTA, or reasonable-cause relief applies to your situation, contact SW Accounting & Consulting Corp. Primary sources: IRS News Release IR-2026-83, the IRS Administrative Penalty Relief page, the IRS Penalty Relief for Reasonable Cause page, and the National Taxpayer Advocate’s July 2026 blog post.
