Article Summary

On July 8, 2026, the IRS announced the Automatic Exemption from Penalty (AEP), a new program that replaces First Time Abate (FTA) and, for the first time, applies penalty relief automatically rather than requiring taxpayers to ask for it.

• What it covers: AEP suppresses failure-to-file, failure-to-pay, and failure-to-deposit penalties on eligible returns, including Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1.
• Who qualifies: Taxpayers with a clean compliance history — timely filing and timely payment for the three prior tax years, or the 12 consecutive prior quarters for quarterly filers.
• When: The program begins in summer 2026 with 2025 annual returns and 2026 quarterly returns. AEP is slated to fully replace FTA for returns with original due dates on or after January 1, 2027.
• What to do now: Most eligible taxpayers won’t need to do anything. But penalty notices received during the transition deserve a close look and shouldn’t be assumed to resolve themselves.

On July 8, 2026, the IRS announced a significant change to how it handles penalty relief for taxpayers. The new program, called “Automatic Exemption from Penalty (AEP),” will replace the long-standing First Time Abate (FTA) program and, for the first time, apply penalty relief automatically rather than requiring taxpayers to ask for it.

What’s Changing: Relief Becomes Automatic

Under the current system, taxpayers hit with a failure-to-file, failure-to-pay, or failure-to-deposit penalty, who otherwise have a clean compliance record, must affirmatively request First Time Abate relief from the IRS. It’s routinely granted to eligible taxpayers, but it still requires someone to notice the penalty, know the relief exists, and make the request (possibly with the help of a professional). As a result, FTA most benefits taxpayers with tax knowledge or financial ability.

Beginning this summer, the IRS will automatically screen eligible returns and, for qualifying taxpayers, will suppress these three penalty types during processing, before they’re ever assessed. If the IRS grants the relief, it will simply send a notice confirming that it did.

Who Qualifies for AEP?

Eligibility under AEP is based on a taxpayer’s compliance history, much like the current FTA process. A taxpayer qualifies if they have a track record of timely filing and timely paying any tax due for the three prior tax years (for annual returns), or the 12 consecutive prior quarters (for quarterly returns).

AEP applies to eligible original returns starting with 2025 annual returns and 2026 quarterly returns. Not everything qualifies, though. Only penalties associated with the following return types qualify for AEP consideration:

• Forms 1040, 1065, 1120 (individual, partnership, and corporate income tax returns)
• Forms 940, 941, 943, 944, 945 (employment tax returns)
• Form CT-1 (railroad retirement tax return)

Timeline: FTA Is Being Phased Out

The IRS isn’t shutting off FTA overnight. Over the summer of 2026, the two programs will run in parallel as the agency transitions. During this window, some taxpayers who would otherwise qualify may still receive a penalty notice. If that happens, they may contact the IRS and request FTA under the old procedures. AEP is slated to fully replace FTA for returns with original due dates on or after January 1, 2027.

Taxpayers who don’t meet AEP’s criteria aren’t out of options; they can still request penalty relief based on “reasonable cause,” which remains a separate, fact-specific process. Taxpayers who qualify for AEP relief still owe any underlying tax and interest, along with any penalties that fall outside the AEP qualification.

What Are the Benefits of This Change?

Less administrative burden

Taxpayers no longer need to know the FTA program exists, catch the penalty on a notice, and file a request. For firms and individuals managing multiple filings, this removes a recurring compliance task.

Faster, more consistent relief

Because relief is applied during processing rather than after filing a request that may take the IRS months to review, eligible taxpayers should see penalties suppressed from the outset rather than assessed and later abated. This may reduce the back-and-forth of notices, payments, and refund claims.

More equitable application

Historically, FTA has been underused simply because taxpayers didn’t know to ask for it or didn’t realize they qualified. An automatic process closes that awareness gap and should mean the benefit reaches more of the taxpayers who are actually entitled to it.

What Are the Downsides?

Loss of control over timing and application of relief

Because FTA was applied based on request, taxpayers who had good grounds for abatement due to reasonable cause could put forth a request for abatement based on reasonable cause instead of based on FTA, thereby reserving their FTA relief for a future instance when reasonable cause may not be available. Because the AEP is applied automatically, taxpayers will lose this planning ability.

Eligibility isn’t obvious to the taxpayer

Because AEP is automatic, taxpayers are not meaningfully involved in the process to apply relief. This means taxpayers have no way to confirm in advance whether they qualify or reasonable means to correct an error in the IRS’s data before a penalty decision is made under AEP. That places more weight on the accuracy of the IRS’s own compliance-history data, which can be flawed.

AEP is effectively a one-time benefit

Like its predecessor, AEP is designed around a clean compliance history — it isn’t a recurring safety net for taxpayers who fall behind more than once. Taxpayers should still treat filing and payment deadlines seriously rather than relying on this relief as a backstop.

What Taxpayers Should Do Now

Most eligible taxpayers won’t need to do anything; that’s the point of the change. But it’s worth keeping an eye on penalty notices received over the next several months, since the FTA-to-AEP transition means the process isn’t fully automatic yet. Taxpayers who receive a penalty notice they believe shouldn’t have been assessed, whether under AEP’s criteria or under reasonable cause, should not assume it will resolve itself and should address it directly, either by contacting the IRS or by speaking with their tax attorney.

Frequently Asked Questions About IRS Automatic Penalty Relief

Do I need to apply for the Automatic Exemption from Penalty (AEP)?

No. Unlike FTA, AEP doesn’t require a request. The IRS screens eligible returns during processing and, for qualifying taxpayers, suppresses the penalty before it’s ever assessed. If the IRS grants the relief, it will send a notice confirming that it did.

When does AEP take effect?

AEP begins in summer 2026 and applies to eligible original returns starting with 2025 annual returns and 2026 quarterly returns. It is slated to fully replace FTAfor returns with original due dates on or after January 1, 2027.

What if I receive a penalty notice during the transition but believe I qualify for AEP?

That can happen. Over the summer of 2026, the two programs will run in parallel, and some taxpayers who would otherwise qualify may still receive a penalty notice. Taxpayers in that position shouldn’t assume the notice will resolve itself; they may contact the IRS and request FTA under the old procedures, or speak with their tax attorney.

Does AEP eliminate the tax I owe?

No. AEP prevents certain penalties from being assessed, but taxpayers still owe any underlying tax and interest, along with any penalties that fall outside the AEP qualification.

What about penalties for 2024 or earlier tax years?

AEP doesn’t reach back to returns prior to 2025 — but FTA remains an eligible remedy for any return with an original due date prior to January 1, 2027. That includes 2024 and earlier tax years, as well as eligible 2025 and 2026 returns caught in the transition. The difference is that relief for pre-2025 periods must still be requested under the FTA procedures rather than applied automatically. Taxpayers with an outstanding penalty from an earlier period that may qualify shouldn’t wait for the transition to run its course; they should raise it with the IRS or their tax attorney now.

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Sources

• IRS Newsroom: IRS simplifies penalty relief, introduces automatic process for eligible taxpayers (July 8, 2026)
• IRS: Administrative penalty relief (FTA and AEP)
• IRS: Penalty relief for reasonable cause
• National Taxpayer Advocate Blog: A Long-Awaited Taxpayer Win — The IRS Implements Automatic Penalty Relief

This article is for informational purposes only and does not constitute legal or tax advice. Reading this article does not create an attorney-client relationship. For advice about your specific situation, please contact a qualified tax professional.