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Taxpayers and business owners have long had access to penalty relief under specific circumstances, but claiming that relief traditionally required contacting the IRS directly. Under IRS Notice IR-2026-83, the agency is fundamentally changing this process by launching the Automatic Exemption from Penalty (AEP).

This new systemic program automatically waives common penalties for compliant taxpayers without requiring formal requests, written letters, or phone calls. Here is everything you need to know about how AEP works, who qualifies, and how it replaces the long-standing First Time Abate (FTA) policy.

What Is the Automatic Exemption from Penalty (AEP)?

The Automatic Exemption from Penalty (AEP) is a new administrative relief mechanism designed to simplify penalty waivers and reduce burden for compliant taxpayers. Historically, taxpayers with clean compliance records had to proactively request First Time Abate (FTA) after receiving a penalty notice.

Under AEP, when an eligible tax return is processed late or with unpaid balances, the IRS automatically evaluates the taxpayer’s compliance history. If criteria are met, the IRS suppresses penalty assessment upfront and mails a notice confirming that automatic relief was applied. Taxpayers do not need to take any action or contact the IRS to receive this exemption.

Covered Penalties and Eligible Tax Forms

AEP applies to specific routine penalties assessed during return processing.

Penalties Covered Under AEP

• Failure to File: Applies to individual tax returns [IRC Sec. 6651(a)(1)], partnership returns [IRC Sec. 6698(a)(1)], and S corporation returns [IRC Sec. 6699(a)(1)].

• Failure to Pay: Applies when tax shown on the return is not paid by the due date [IRC Sec. 6651(a)(2)] or when tax required to be shown is not paid by the date stated in an IRS notice or demand [IRC Sec. 6651(a)(3)].

• Failure to Deposit: Applies when employment or corporate taxes are not deposited in the correct amount, within the prescribed time period, or in the required manner [IRC Sec. 6656].

Eligible Return Forms

AEP consideration is available for the following return series:

• Individual & Business Income Tax: Forms 1040, 1065, and 1120.

• Employment Tax Returns: Forms 940, 941, 943, 944, and 945.

Excluded Returns & Penalties

AEP does not cover all filings or penalty types. Ineligible items include:

• Information returns.

• Returns filed only in response to specific transactions or infrequent events, such as Form 706 (U.S. Estate Tax Return) and Form 709 (United States Gift Tax Return).

• The Daily Delinquency Penalty (DDP) or information reporting dependent on another filing.

Qualification Criteria: Do You Qualify for AEP?

To qualify for AEP, taxpayers must demonstrate a timely compliance history prior to the filing period in question.

General Eligibility Requirements

1. Prior Compliance Period: You must have timely filed the same return type for the prior three tax years (or 12 consecutive quarters for quarterly filers).

2. Clean Penalty Record: Either no penalties (excluding estimated tax penalties) were assessed during the lookback period, or any assessed penalties were later abated due to reasonable cause or IRS error.

Additional Business Return Rules

Business taxpayers must meet two extra conditions to qualify for Failure to Deposit penalty relief under AEP:

• The IRS must not have waived failure-to-deposit penalties four or more times during the prior three years (or 12 quarters).

• The failure to deposit penalty was not charged for Electronic Federal Tax Payment System (EFTPS) avoidance.

Key Differences: First Time Abate (FTA) vs. Automatic Exemption from Penalty (AEP)

The IRS is transitioning from First Time Abate to AEP. While both target taxpayers with strong compliance records, the delivery mechanism is fundamentally different.

Feature	First Time Abate (FTA)	Automatic Exemption from Penalty (AEP)
Applicable Timeframe	Eligible 2025 tax year & 2026 quarterly returns, plus all prior tax years	Eligible 2025 tax year returns, 2026 quarterly returns, and all future tax periods
Relief Mechanism	Manual / Not automatic	Fully Automatic
Taxpayer Action	Taxpayer must contact the IRS to request relief	No taxpayer action required
Penalty Assessment	Penalty is assessed first, then removed upon approval	No penalty assessment is made during return processing
Failure to Pay Accrual	Penalty may continue to accrue until tax is fully paid	Does not accrue and is not assessed on unpaid tax

Implementation Timeline & Transition Period

The transition from First Time Abate to AEP follows a phased schedule:

1. Effective Starting Dates: AEP applies to original returns for the 2025 tax year and 2026 quarterly returns going forward.

2. Summer 2026 Phased Rollout: The IRS begins phasing out FTA and rolling out AEP during the summer of 2026.

3. Transition Rules: During the summer 2026 transition, some qualifying taxpayers may still receive penalty notices for eligible 2025 or 2026 returns. Taxpayers who receive a notice but believe they qualify can still contact the IRS to request First Time Abate manually.

4. Full Automation Target: AEP will fully replace First Time Abate for eligible returns with original due dates on or after January 1, 2027.

Important Taxpayer Considerations

• Tax and Interest Still Due: AEP waives administrative penalties, but it does not eliminate underlying tax liabilities or interest charges accrued on unpaid balances. You still remain responsible for paying the tax and interest due.

• Reasonable Cause Relief Remains Available: Taxpayers who fail to meet the three-year compliance history for AEP can still apply for penalty relief under traditional reasonable cause guidelines. The IRS will review reasonable cause requests individually.

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Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice and that new changes in rules and regulations may render this content out of date.