The IRS changed an important part of its penalty-relief process in 2026. A new program called Automatic Exemption from Penalty, or AEP, is replacing the long-standing First Time Abate process for eligible tax periods.
The main difference is simple: eligible taxpayers may no longer need to contact the IRS and ask for administrative penalty relief. If the taxpayer meets the requirements, the IRS can apply the relief automatically. That does not mean every penalty will disappear. It also does not mean taxpayers should ignore filing or payment deadlines.
Here is what changed, who may qualify, and what to do if you receive an IRS penalty notice.
What Is Automatic Exemption from Penalty?
Automatic Exemption from Penalty is a new IRS administrative relief process. It is designed for taxpayers who normally file and pay their taxes on time but have an isolated compliance problem. The IRS announced the change on July 8, 2026. Under AEP, eligible taxpayers can receive relief from certain penalties without filing a separate request.
How Is AEP Different from First Time Abate?
For many years, First Time Abate, or FTA, was the IRS’s main administrative penalty-relief program for taxpayers with a good compliance history. Under FTA, the penalty was generally assessed first. The taxpayer then had to contact the IRS and request relief.
AEP changes that process.
| First Time Abate | Automatic Exemption from Penalty |
| Taxpayer generally requests relief | IRS applies relief automatically when eligible |
| Penalty may be assessed first | Qualifying penalty is not assessed |
| Requires contact with the IRS | No separate request is normally required |
| Applies to earlier eligible periods during the transition | Applies to qualifying newer and future periods |
Which Tax Periods Are Covered?
AEP begins with eligible:
- 2025 tax-year returns;
- 2026 quarterly returns; and
- Future qualifying tax periods.
The IRS says AEP will fully replace First Time Abate for eligible original returns with due dates on or after January 1, 2027. During the transition, some taxpayers may still receive penalty notices for periods that could qualify for relief. Taxpayers should not assume that every 2025 or 2026 penalty will automatically be handled under AEP. The transition period matters, and some taxpayers may still need to contact the IRS.
Who May Qualify for AEP?
The key requirement is a strong recent compliance history.
For most eligible annual returns, the taxpayer generally needs to have filed and paid on time during the previous three years. For quarterly filers, the IRS looks at the prior 12 consecutive quarters. AEP is intended primarily for taxpayers with a good compliance record who experience an isolated filing, payment, or deposit problem. It is not a general waiver for repeated noncompliance.
Which Penalties Can AEP Cover?
AEP may prevent certain common penalties from being assessed.
These include qualifying:
- Failure-to-file penalties;
- Failure-to-pay penalties; and
- Failure-to-deposit penalties.
Eligible return series include certain Forms 1040, 1065, 1120, 940, 941, 943, 944, 945, and CT-1. Not every return qualifies. For example, some returns connected to one-time or infrequent events are generally excluded. Taxpayers should confirm both the penalty type and the return type before assuming AEP applies.
Does AEP Remove the Tax You Owe?
No.
AEP deals with certain penalties. It does not erase the underlying tax balance.
Interest and other penalties may also remain due. AEP should not be described as tax-debt forgiveness. A taxpayer may receive penalty relief and still need a payment plan or another IRS resolution strategy for the remaining balance.
What If You Receive a Penalty Notice Anyway?
Do not assume the penalty is correct. During the transition to AEP, some taxpayers who appear eligible may still receive a penalty notice.
If that happens, review:
- The type of penalty;
- The tax period;
- Your filing history;
- Your payment history; and
- Whether the return appears eligible for AEP.
The IRS advises taxpayers who believe they should have qualified for relief to contact the agency. This is also a good reason to review the notice before paying the penalty or submitting a separate abatement request.
What If You Do Not Qualify for AEP?
AEP is not the only form of IRS penalty relief. You may still have another option.
One important route is reasonable cause.
Taxpayers who do not qualify for AEP should not assume that penalty relief is unavailable. A separate reasonable-cause request may still be appropriate if the facts support it. Circumstances may include serious illness, natural disasters, unavailable records, or other events that prevented timely compliance.
The facts and supporting documents matter.
How IRS Audit Group Can Help
AEP may make administrative relief simpler, but penalty notices can still be confusing.
IRS Audit Group can help by reviewing:
- The penalty notice;
- The tax period involved;
- Your filing and payment history;
- Whether AEP appears to apply;
- Whether another type of penalty relief may be available;
- Whether reasonable cause should be considered; and
- Whether the remaining tax balance needs a separate resolution strategy.
If relief is not automatic, we can help prepare the appropriate request and supporting documentation. If the IRS denies relief, we can also review the decision and available next steps.
Received an IRS Penalty Notice?
Do not ignore the notice. But do not assume you have no options.
The IRS penalty-relief process changed in 2026. For some taxpayers, relief may now be applied automatically. Others may still need to request relief based on their circumstances. The first step is to understand what the IRS assessed and why.
IRS Audit Group can help you review the notice, understand the available options, and determine the next step.
Call: (310) 498-7508
Email: info@irs-audit-group.com
Offices: Beverly Hills and Newport Beach, California
Serving clients nationwide
[Learn More About IRS Penalty Abatement Services]
Don’t Panic… But, Don’t Delay!
IRS AUDIT GROUP
IRS Audit Group consists of tax professionals, CPAs, enrolled agents, and tax attorneys. We are located in Los Angeles, California, and our primary area of expertise is IRS Tax Audit Representation. However, our certified professionals cooperate and work with all IRS offices nationwide. Please get in touch with us for more information.
Telephone Number: (310) 498-7508