Automatic Exemption from Penalty: What taxpayers should know

FS-2026-12, July 2026

The IRS is introducing the Automatic Exemption from Penalty, known as AEP, to recognize taxpayers with a history of timely compliance. AEP is intended to help eligible taxpayers who generally meet their filing, payment and deposit obligations on time but have a one-time compliance issue. 

AEP does not eliminate penalties under the law. Taxpayers should continue to file required returns, pay taxes, and make deposits by the due date. 

How AEP works

AEP prevents certain penalties from being assessed during original return processing when the taxpayer meets the eligibility requirements. No application, form, or separate request is required.

AEP may apply to certain:

• Failure to file penalties
• Failure to pay penalties
• Failure to deposit penalties

To qualify, taxpayers must meet the applicable requirements, including having three prior years of timely compliance.

When AEP applies, the IRS will send the taxpayer a notice explaining that the penalty was not assessed because of the taxpayer's three prior years of timely compliance. 

Penalties still apply

AEP only prevents certain penalties from being assessed. Taxpayers who do not meet the eligibility requirements may still be assessed penalties, including failure to file, failure to pay, and failure to deposit penalties.  

AEP generally will only apply to the penalties listed above and does not apply to all penalties. For example, AEP does not apply to:

• Daily Delinquency penalties
• Accuracy-related penalties
• Information return penalties 
• Other penalties not covered by AEP

Taxpayers remain responsible for meeting all filing, payment, deposit, and reporting requirements. 

No action needed from taxpayers

AEP will be applied automatically during original return processing when the taxpayer qualifies, 

because AEP is automatic, taxpayers do not need to take action to receive this relief. If eligible, the IRS will apply AEP and issue a notice to the taxpayer confirming that the relief was granted.

AEP is not available to everyone who files late

AEP is limited to eligible returns. A taxpayer who files an eligible return late, pays late, or deposits late will only automatically receive relief when all AEP requirements are met. The three prior years (or 12 consecutive quarters) of timely compliance requirement is a key part of eligibility.

First Time Abate transition

First Time Abate, or FTA, remains available for certain returns during the transition to AEP. 

FTA still applies to:

• Eligible 2024 tax year returns
• Eligible 2025 quarterly returns
• Eligible 2025 tax year returns processed before AEP starts
• Eligible 2026 quarterly returns processed before AEP starts

However, taxpayers will need to contact the IRS and request FTA for these returns, as it will not be applied automatically. 

For original returns with due dates of Jan. 1, 2027, or later, FTA will no longer be available and will be replaced by AEP.

Other penalty relief may be available

Taxpayers who do not qualify for AEP may still have other options. They may request penalty relief based on reasonable cause if they believe they meet the requirements. 

Taxpayers may also appeal an adverse penalty relief decision. 

Key reminders

Taxpayers should continue to file and pay on time. AEP does not eliminate penalties, does not apply to every taxpayer, and does not apply to every type of penalty. 

AEP is applied automatically when a taxpayer qualifies, and the IRS will notify taxpayers when a penalty was not assessed because of their timely compliance.