Receiving a penalty notice from the IRS can be stressful, especially when you have a history of filing and paying your taxes on time. A new program from the IRS, called Automatic Exemption from Penalty (AEP), is designed to make the process of requesting and receiving penalty relief easier for taxpayers who have a demonstrated history of timely tax compliance–without requiring eligible taxpayers to contact the IRS first.
This program, which the IRS has already begun phasing in during the summer of 2026, will completely replace the IRS’s longstanding First Time Abate (FTA) program for eligible original returns with due dates on or after January 1, 2027.
In our latest blog, we cover what taxpayers should understand about this change.
What is Automatic Penalty Relief?
The new AEP program is replacing the IRS's longstanding First Time Abate (FTA) process for eligible returns. With AEP, the IRS aims to simplify the bureaucratic process for taxpayers requesting relief from certain penalties.
Under FTA, certain taxpayers with a history of timely filing and payment could generally expect to have certain penalties removed with a simple request to the IRS. The new system eliminates the step of having eligible taxpayers contact the IRS to request relief from certain penalties: if you qualify for AEP, the IRS will automatically apply the relief when processing your eligible return.
AEP may cover:
Failure-to-file penalties
Failure-to-pay penalties
Failure-to-deposit penalties (for eligible business taxpayers)
It’s important to note that AEP does not eliminate all penalties or change your responsibility to meet filing, payment, and deposit deadlines.
Who Qualifies for AEP?
Generally, AEP will be available to taxpayers who have a demonstrated history of timely compliance. The IRS typically looks for a history of timely filing and payment over the previous three years, though for certain quarterly returns, they may look at the previous 12 consecutive quarters.
For most taxpayers, eligibility based on a history of compliance will mean:
You filed your required returns on time
You paid any tax due for those years on time
Other requirements also apply. The original return must be filed within three years of its due date (without added extensions). After receiving an AEP, you typically will need another three consecutive compliant years (or 12 consecutive quarters) before you would be eligible again for AEP for that specific return type. For spouses filing jointly, both spouses must meet the compliance requirements.
If you meet the requirements and your return is otherwise eligible, AEP now automatically prevents certain penalties from being assessed.
What Doesn’t AEP Cover?
Not every taxpayer or tax return will qualify. Specific types of returns filed, including Form 706, U.S. Estate Tax Return, and Form 709, U.S. Gift Tax Return, generally are not eligible for AEP. Other types of penalties not covered by AEP include:
Estimated tax underpayment penalties, which are different than failure-to-pay penalties, and have their own specific calculation and waiver rules.
Accuracy-related penalties
Information-return penalties
What Happens If You Qualify for AEP?
If the IRS determines that you qualify, it will apply the relief during processing and send you a notice explaining that the covered penalty was not assessed – as the name indicates, the penalty relief is applied automatically. Taxpayers who receive this notice generally do not need to contact the IRS, submit a form, or respond to the notice.
However, it's important to understand that automatic penalty relief does not erase the tax you owe. You are still responsible for unpaid taxes, as well as any interest or penalties not covered by the relief.
Keeping good records is important here: keep a copy of the relief notice with your tax records, and review any separate balance-due notice carefully. A letter confirming penalty relief does not necessarily mean your account balance is zero.
What If You Still Receive an IRS Penalty Notice?
The transition to AEP is happening in stages, so taxpayers should not assume that every penalty notice they receive is automatically covered by AEP. If you receive a penalty notice and do not also receive a notice explaining that AEP was applied, review the notice carefully, noting the stated tax year, type of penalty, and any response deadline. Send a copy to our office – we can help you determine what action is appropriate.
During the transition, some eligible 2025 tax-year returns and 2026 quarterly returns may not receive automatic relief. Depending on your circumstances, you may qualify for AEP or FTA during the transition period, or another form of penalty relief depending on your individual circumstances.
Don't ignore an IRS penalty notice simply because you believe you qualify for automatic relief. During this transitional period, it is important to understand how the penalty was assessed and whether additional action is needed.
The Bottom Line
Automatic penalty relief may result in fewer steps, less paperwork, and less time spent navigating the penalty relief process for eligible taxpayers. But it is not a blanket exemption from penalties. Filing and paying on time remain the best ways to avoid unnecessary penalties.
If you're unsure how the new rules apply to your circumstances, or if you receive a tax penalty notice during the transitional period, we can help you understand your options and determine the appropriate next steps. Angolano & Company is here to help you navigate this transition.