The IRS has announced a major change to how it grants penalty relief to taxpayers with a solid compliance history.
Starting in summer 2026, the agency will begin phasing out First Time Penalty Abatement and replacing it with a new program called the Automatic Exemption from Penalty (AEP). The change is designed to reduce paperwork and give qualifying taxpayers relief without requiring a formal request.
TL;DR: The IRS is replacing First Time Penalty Abatement with the Automatic Exemption from Penalty (AEP), which will automatically waive certain penalties for taxpayers with a timely filing and payment history, starting with tax year 2025 and fully in place by January 1, 2027.
What Is the Automatic Exemption From Penalty?
The Automatic Exemption from Penalty is a new systemic relief program that the IRS will apply on its own, without a taxpayer needing to submit a request. If a taxpayer qualifies, the IRS will not assess certain penalties during processing, and the agency will send written confirmation once the relief has been granted. This is a shift from the old process, where taxpayers or their tax professionals had to proactively ask for First Time Abate relief after a penalty had already been charged.
AEP covers three common penalty types:
Failure to File
This penalty applies when a return is not submitted by its due date. Under AEP, eligible taxpayers will not have this penalty assessed in the first place, rather than having to request its removal afterward.
Failure to Pay
This penalty applies when tax owed is not paid by the due date, even if the return itself was filed on time. This penalty stacks up over time for taxpayers who file but do not pay in full.
Failure to Deposit
This penalty typically applies to employers who do not deposit payroll taxes on schedule. Business owners managing multiple deadlines, including the ones we outlined in our guide to the September 15 business extension deadline, should take note of this change as well.
Who Qualifies for AEP?
To qualify, a taxpayer needs a track record of timely filing and paying in the three tax years prior to the period when the penalty would apply, or 12 consecutive quarters for quarterly returns. This mirrors the eligibility standard that applied under First Time Abatement, so taxpayers who previously qualified for that relief will likely qualify for AEP as well. Not every return type is eligible. Information returns and filings tied to one-time events, such as estate or gift tax returns, generally will not receive AEP.
What AEP Doesn’t Cover
It’s worth being clear about the limits of this program. AEP does not replace Reasonable Cause penalty relief, which remains available for taxpayers who missed a deadline due to circumstances like illness, natural disaster, or other qualifying hardships. AEP also does not eliminate interest that has accrued on unpaid tax balances. Taxpayers will still owe any tax due plus interest, along with any penalties that fall outside the scope of this relief.
When Does AEP Take Effect?
The phase-out of First Time Abatement begins immediately, and the transition to AEP will be complete for returns with original due dates on or after January 1, 2027. AEP itself applies to eligible tax year 2025 and 2026 returns, so some taxpayers may see this relief applied well before the full transition date. During the overlap period, some taxpayers who qualify may still receive penalty notices as the IRS shifts its systems over. If that happens, taxpayers can still contact the IRS to request First Time Abatement directly.
How JBS Corp Can Help
Tax rules around penalties and compliance history can get complicated quickly, especially for freelancers juggling quarterly estimated payments or real estate investors managing multiple filings. Staying accurate on your return also matters here, since a pattern of under-reported income can affect your standing with the IRS well beyond a single penalty. Our team stays current on IRS policy changes like this one so our clients do not have to track every update themselves. If you have questions about a penalty notice or want to confirm whether your filing history qualifies you for relief, reach out to our team to talk through your specific situation.
Note: This article is for educational purposes only and does not constitute tax advice. Tax rules, figures, and percentages are subject to change and this article may not be fully up to date; visit IRS.gov for the most current information and consult a tax professional for guidance specific to your situation.
