On July 8, 2026, the Internal Revenue Service announced the Automatic Exemption from Penalty (AEP), a systemic administrative relief program that will replace First Time Abate (FTA), the agency’s most common form of administrative penalty relief. The central change is procedural rather than substantive: relief that eligible taxpayers previously had to request will now be applied by the IRS during processing.
The program is expected to begin in the summer of 2026. Because the transition runs across the balance of this year, the details of the timing matter as much as the details of the relief.
The eligibility standard
A taxpayer qualifies for AEP by having a history of timely filing the return and timely paying any tax due for the three prior years. For quarterly returns, the corresponding standard is twelve consecutive quarters. The two formulations describe the same lookback period, expressed to match the filing frequency. A quarterly filer is therefore measured across twelve separate filing and payment events within that window rather than three.
Where a taxpayer qualifies, the IRS states that the following penalties will not be assessed during processing:
- Failure to file
- Failure to pay
- Failure to deposit
No request is required. The IRS will apply the relief and issue a notice confirming that it was granted.
What the program covers, and when
AEP applies to eligible original returns beginning with tax year 2025, to 2026 quarterly returns, and to future tax periods.
Not all returns are eligible. The IRS specifies that information returns, and returns filed only in response to specific transactions or infrequent events, generally are not covered. The examples given in the announcement are Form 706, United States Estate Tax Return, and Form 709, Gift Tax Return.
Relief from the assessment of a penalty is also not relief from the underlying obligation. The IRS is explicit on this point: while AEP prevents the assessment of certain penalties, taxpayers must still pay any tax and interest due, along with any penalties that are not eligible for relief.
Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause. The IRS will review those requests and notify the taxpayer of the outcome.
The transition period still requires action
This is the portion of the announcement with the most immediate practical consequence.
The IRS will begin phasing out First Time Abate and transitioning to AEP during the summer of 2026. During that transition, the agency states that some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 and 2026 quarterly returns. Taxpayers who believe they qualify may contact the IRS to request First Time Abate.
In other words, the relief does not become fully automatic on announcement. AEP replaces First Time Abate for eligible returns with original due dates on or after January 1, 2027. Until that point, a qualifying taxpayer who receives a penalty notice may still need to affirmatively request relief in order to receive it. A notice arriving during the phase-out is not necessarily an error, and it is not necessarily something the new system will resolve on its own.
For those individuals receiving IRS correspondence between now and January 1, 2027, the appropriate response is to read the notice and evaluate eligibility, rather than to assume the automatic process has already taken effect.
Why the IRS made the change
The agency has framed AEP in terms of fairness, consistency, and voluntary compliance. The reasoning is that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.
The practical problem being addressed is one of access. First Time Abate has long been available to eligible taxpayers who asked for it, which meant that the benefit reached the taxpayers who knew it existed. As reported by Bloomberg Tax, the opt-in requirement left millions of taxpayers without the relief they qualified for, particularly those who could not afford representation. Automating the determination removes that filter and applies the same standard to everyone processed under it.
What this means going forward
For most taxpayers with a clean compliance record, AEP is a reduction in administrative burden and nothing more complicated than that. Two points are worth carrying forward.
First, compliance history is the eligibility standard. Timely filing and timely payment across the lookback period is what qualifies a taxpayer, and for those filing quarterly, that record is built and maintained across every quarter in the window.
Second, the transition is not instantaneous. Between the summer of 2026 and January 1, 2027, the older process and the newer one overlap, and a penalty notice during that period may still call for a request that a taxpayer would otherwise assume was unnecessary.
This article is provided for general informational purposes, is based on IRS News Release IR-2026-83 (July 8, 2026), and does not constitute legal or tax advice or create an attorney-client relationship. Penalty relief eligibility depends on specific facts. Please consult qualified counsel regarding your circumstances.
