If you’ve ever paid a tax penalty on time and then had to fill out paperwork just to get it waived, the IRS has some good news. Starting this summer, a new program called the Automatic Exemption from Penalty (AEP) will remove certain penalties for eligible taxpayers without requiring a request at all.
For business owners who have built a solid compliance history, this is a welcome adjustment. But like most IRS changes, it’s worth understanding the fine print, especially during the transition period.
What Is the Automatic Exemption from Penalty?
AEP is a new IRS program announced July 8, 2026, that automatically waives certain penalties for taxpayers with a track record of filing and paying on time. It replaces First Time Abate, the manual relief process many businesses have relied on for years.
Under the old system, a taxpayer with a clean compliance history had to contact the IRS and request that a penalty be removed. Under AEP, the IRS applies the relief on its own and sends a notice confirming it.
In plain terms: if you have a history of paying on time, the IRS will now recognize that automatically instead of making you ask for credit.
Who Qualifies
To qualify for AEP, a taxpayer needs a history of timely filing and paying in the three prior years, or across 12 consecutive quarters for quarterly returns. When that history holds up, the IRS will not assess penalties during processing for:
Failure to file
Failure to pay
Failure to deposit
AEP applies to eligible original returns starting with tax year 2025, plus 2026 quarterly returns and future periods going forward.
Not every return qualifies. Information returns and filings tied to one-time events, such as estate or gift tax returns, are generally excluded.
When the Change Takes Effect
The IRS will begin transitioning from First Time Abate to AEP during the summer of 2026. This is a phase-in, not an overnight switch, so a few things to expect:
Some taxpayers who qualify may still receive a penalty notice on 2025 or 2026 returns during the transition.
If that happens, you can still contact the IRS and request First Time Abate directly.
AEP becomes the standard replacement for First Time Abate on returns with original due dates on or after January 1, 2027.
What This Doesn’t Change
AEP prevents certain penalties from being assessed. It does not erase the underlying tax bill. Taxpayers are still responsible for any tax owed, interest, and any penalties that fall outside AEP’s scope.
If you don’t qualify for AEP, reasonable cause relief is still available. That process requires a request and IRS review, the same as before.
A clean compliance history is quickly becoming one of the most valuable assets a business can have with the IRS.
One Trade-Off Worth Understanding
AEP is an administrative form of relief, the same category First Time Abate falls into. Reasonable cause relief, by contrast, is a statutory waiver under the tax code. That distinction carries real planning implications for how a penalty is handled.
Because AEP applies automatically, a practitioner no longer has the option to make that call. Reasonable cause has no limit on how often it can be used. Administrative relief like AEP generally does. If AEP is applied automatically to a penalty that could have qualified under reasonable cause instead, it may use up that administrative relief for no reason, leaving a taxpayer without it in a future year when reasonable cause doesn’t apply and the administrative option would have been the better fit.
In practice: the automation that makes AEP convenient is the same automation that removes a layer of strategic choice. Business owners working with an advisor should ask whether AEP is being applied in a way that preserves their options, not just whether a penalty was removed.
What Business Owners Should Do Now
If your filing and payment history has been reliable, you’re likely already positioned to benefit. If it hasn’t, this is a good moment to talk through what a stronger compliance track record could mean for how your business is treated going forward, penalties included.
We can review your recent filing history, flag any exposure during the transition period, and help you understand where you stand under the new rules. Schedule a consultation with our tax team to talk through what AEP means for your business.
Frequently Asked Questions
No. If you qualify, the IRS applies the relief automatically and sends a confirmation notice. There’s no form to file or request to submit.
You can still request First Time Abate directly from the IRS while the two programs overlap during summer 2026.
No. AEP only addresses certain penalties. Any tax owed, along with interest, still needs to be paid.
You can still request penalty relief based on reasonable cause. The IRS reviews these requests individually and notifies you of the outcome.
Failure to file, failure to pay, and failure to deposit penalties, provided your return type is eligible and your compliance history qualifies.
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