The Internal Revenue Service (IRS) is introducing a new procedure in 2026 designed to automatically waive certain penalties for taxpayers who have a solid history of tax compliance, even if they experience an occasional delay.
Named the Automatic Exemption from Penalty (AEP), this initiative marks a significant shift from previous practices. Eligible taxpayers will no longer need to contact the IRS or submit specific requests for penalty relief.
Rather than initially imposing a penalty and then requiring the taxpayer to seek its removal, the IRS can now proactively identify eligible individuals or businesses and prevent certain penalties from being applied in the first place.
Understanding the Automatic Exemption from Penalty Program
Implemented in the summer of 2026, the AEP can be applied to eligible original returns for the 2025 tax year and beyond, as well as to certain quarterly returns from 2026 onwards, based on the IRS's official administrative penalty relief guidelines.
The AEP primarily focuses on three types of non-compliance:
- Late filing of tax returns.
- Delayed payment of certain taxes owed.
- Failure to make timely tax deposits, particularly for employers.
For individual taxpayers, failing to file on time is a significant concern. Typically, the IRS charges a penalty of 5% of the unpaid tax per month or part of a month up to a general maximum of 25%. The penalty for non-payment usually starts at 0.5% per month of the outstanding tax and can reach certain legally established limits.
Eligibility Criteria: A Three-Year Compliance History
Eligibility for the AEP program requires more than just a first-time delay. Taxpayers must demonstrate timely compliance over the past three years or, for certain quarterly returns, over the preceding 12 consecutive quarters.
The IRS specifies that the same type of return must have been filed on time during this period. Additionally, taxpayers should not have incurred certain disqualifying penalties during those years. However, the penalty related to estimated taxes alone does not preclude access to the AEP.
Eligibility may still be possible if a previous penalty was later removed due to a reasonable cause accepted by the IRS or an agency error.
Forms That Qualify for the AEP
The IRS provides a list of frequently used forms by individuals and businesses in the United States that are eligible for the AEP:
- Form 1040
- Form 1065
- Form 1120
- Forms 940, 941, 943, 944, and 945
- Form CT-1
This benefit is not limited to individual taxpayers; it also extends to certain businesses and employers meeting the criteria. Businesses must also satisfy additional conditions related to their federal tax deposit history.
Limitations of the Automatic Relief Program
Not all forms or penalties are included in the automatic relief. The IRS explicitly states that certain forms filed only once or due to specific events are not eligible. Examples include Form 706, related to estate taxes, and Form 709, used for certain gifts.
Additionally, penalties like daily delinquency fines and certain informant-related penalties are not covered.
Despite the introduction of AEP, tax penalties still exist, and taxpayers must continue to file, pay, and make deposits by the due dates.
Automatic Relief Without Application
This represents a major shift from the former First Time Abate (FTA) system. Under AEP, the IRS reviews records during the processing of the original return and automatically determines if the taxpayer meets the criteria.
If eligible, the agency refrains from imposing the covered penalties and subsequently sends a notice explaining that relief was granted due to the taxpayer's compliance history. Recipients of this notice generally do not need to respond or submit any additional forms.
However, if a taxpayer receives a penalty notice and believes they should have qualified for the AEP, the IRS advises contacting the agency.
Responsibilities Remain Despite Penalty Waivers
It's crucial to understand that the absence of a penalty under AEP does not equate to a forgiveness of tax debt. Taxpayers remain liable for any outstanding taxes, accrued interest on those taxes, and any other penalties not covered by the program.
For instance, a taxpayer might qualify to avoid the penalty for late payment but still owe the original tax and the interest accrued on that balance.
Transition from First Time Abate to AEP
AEP is gradually replacing the First Time Abate program, which allowed taxpayers with good records to request the removal of certain penalties. The key difference is that while FTA generally required a taxpayer to contact the IRS to request relief, AEP automatically reviews eligibility.
During the transition period, there may still be 2025 returns or 2026 quarterly returns processed before the new system's implementation that could qualify under the old procedure.
The IRS states that AEP will fully replace First Time Abate for eligible original returns due from January 1, 2027, onwards.
Significance of the October Deadline
The new mechanism comes at a critical time in the U.S. tax calendar. As CiberCuba recently explained, October 15, 2026, is the extended deadline for most taxpayers who requested an extension to file their 2025 federal returns.
Taxpayers who file correctly before this date within a valid extension are not late simply due to filing after April. However, those who miss the extended deadline may face a late filing penalty.
In such cases, a taxpayer with the required compliance history might be eligible for the new automatic relief, provided the return and penalty fall under the program's coverage.
The extension for filing did not change the general due date for paying the 2025 tax, so interest may still accrue on unpaid amounts.
Options for Those Who Don't Qualify
Being ineligible for AEP does not mean there are no other relief options. The IRS allows for the reduction or removal of certain penalties for reasonable cause when circumstances justify non-compliance.
These cases are assessed individually and may depend on factors like severe illness, disasters, inability to access records, or other circumstances that prevented compliance despite acting with due diligence.
Taxpayers receiving a letter or notice from the IRS should specifically review which penalty is being charged, the corresponding year, and whether the AEP was already considered before paying or filing a relief request.
The change means a single infraction is not necessarily a penalty for those maintaining a solid compliance record. However, it does not make delays a consequence-free option: outstanding taxes and their interest persist even if the covered penalty is avoided.
Common Questions About IRS Penalty Relief
Who qualifies for the Automatic Exemption from Penalty?
Taxpayers with a three-year history of timely compliance or 12 consecutive quarters for certain returns, without major disqualifying penalties, qualify for the AEP.
What types of penalties can the AEP prevent?
The AEP can automatically prevent penalties for late filing, delayed payment of taxes, and untimely tax deposits, primarily affecting employers.
Does the AEP remove the obligation to pay taxes and interest?
No, the AEP does not eliminate the responsibility to pay remaining taxes and accrued interest; it only addresses certain penalties.
Will the AEP replace the First Time Abate program entirely?
Yes, the AEP will fully replace the First Time Abate program for all eligible original returns due on or after January 1, 2027.