At a Glance
The IRS has introduced Automatic Exemption from Penalty, a new process that may allow eligible taxpayers to receive certain penalty relief without having to contact the IRS. While the change could simplify relief for taxpayers with a strong filing and payment history, eligibility depends on the type of return, compliance record and applicable tax period.
The IRS recently announced a new process that may make penalty relief easier for taxpayers with a strong record of filing and paying on time. The new program, Automatic Exemption from Penalty, or AEP, is designed to replace the long-standing First Time Abate process for many eligible returns. Rather than requiring taxpayers to contact the IRS to request relief, AEP allows the IRS to apply certain relief automatically during return processing when the taxpayer meets the requirements.
For many individuals and businesses, this change could reduce the time and effort spent resolving penalties that would have qualified for relief under the prior request-based approach. It also reflects a broader effort by the IRS to streamline routine tax administration and limit unnecessary back-and-forth for taxpayers who have maintained a clean compliance history.
Who May Qualify for Automatic Penalty Relief
AEP began in summer 2026 and applies to eligible original returns beginning with tax year 2025, 2026 quarterly returns, and future tax periods. In general, taxpayers must have filed the applicable return on time and paid any tax due for the prior three years. For quarterly returns, the taxpayer must have a timely compliance history for 12 consecutive quarters.
When a taxpayer qualifies, the IRS will not assess certain penalties during processing. The relief may apply to failure to file penalties, failure to pay penalties and failure to deposit penalties. Taxpayers do not need to call or submit a written request to receive AEP. If relief is granted, the IRS will send a notice confirming that it was applied.
Important Limits and Transition Rules
It is important to note that AEP will not apply to every return or every penalty. Information returns and returns filed because of specific transactions or infrequent events generally will not qualify. Examples include Form 706, U.S. Estate Tax Return, and Form 709, United States Gift Tax Return.
Because the change will not happen all at once, some taxpayers who otherwise qualify may still receive penalty notices for eligible tax year 2025 returns or 2026 quarterly returns. During this transition period, taxpayers who believe they qualify may still contact the IRS to request First Time Abate. First Time Abatement remains available for 2025 returns that were not considered for AEP during the transition and prior-year returns filed before 2025. AEP is expected to replace First Time Abate for eligible returns with original due dates on or after Jan. 1, 2027.
What Taxpayers Should Know
Automatic relief does not remove all tax-related responsibilities. Taxpayers remain responsible for paying any tax due, applicable interest, and any penalties that are not eligible for AEP. Taxpayers who do not qualify for AEP may still be able to request penalty relief based on reasonable cause. In those cases, the IRS will review the request and notify the taxpayer of its decision.
While the new process should make relief more accessible for eligible taxpayers, it will still be important to review IRS correspondence carefully. A notice may arrive during the transition period, or a taxpayer may receive a penalty that falls outside the scope of AEP. Individuals and businesses should continue to maintain documentation that supports timely filing, timely deposits, and timely payment activity.
The move to automatic penalty relief is a positive development, but eligibility can still depend on the type of return, the taxpayer’s compliance history, and the timing of the applicable tax period. If you receive a penalty notice or have questions about how AEP may apply to your situation, the Windham Brannon team can help you evaluate the notice and determine next steps. Please reach out to Tomika Bullet or your Windham Brannon advisor for support.
Frequently Asked Questions
- What is Automatic Exemption from Penalty? It is a new IRS process that allows certain penalty relief to be applied automatically during return processing when a taxpayer meets the requirements.
- Who may qualify for AEP? Taxpayers generally need a strong compliance history, including timely filing and payment activity for the prior three years or 12 consecutive quarters for quarterly returns.
- Does AEP cover every penalty? No. AEP only applies to certain penalties and does not cover every return type, including some information returns and returns tied to infrequent transactions.
- What should taxpayers do if they receive a penalty notice? Taxpayers should review the notice carefully, confirm whether AEP or First Time Abate may apply and contact an advisor if they need help determining next steps.
