Changes to IRS Penalty Abatement 2026: Automatic Exemption from Penalty (AEP) Program

Originally from Paladini Law

For years, taxpayers who made an honest mistake had to jump through hoops to get IRS penalties removed, but a major policy shift is changing the landscape of tax relief. On July 8, 2026, the IRS announced the Automatic Exemption from Penalty (AEP) program to automatically waive certain penalties for eligible taxpayers. This new systemic approach will fully replace the legacy First Time Abate (FTA) program for eligible returns with original due dates on or after January 1, 2027. If you have a clean compliance history, understanding the transition to the AEP program is crucial for minimizing your tax burden.

What is the Automatic Exemption from Penalty (AEP) Program?

The AEP program represents a modernization of IRS penalty administration. Historically, under the legacy First Time Abate program, taxpayers had to affirmatively request penalty relief by calling the IRS, submitting Form 843, or sending a written statement. Because the IRS did not proactively notify taxpayers that they qualified for FTA, millions of dollars in eligible penalties went unabated. In fact, a 2012 Treasury Inspector General for Tax Administration (TIGTA) report found that only about 8% of eligible taxpayers actually received First Time Abate relief.

To fix this inequity, the IRS built AEP directly into its return processing system. The AEP program began its initial phase-in period during the summer of 2026. Rather than requiring taxpayers or their representatives to ask for relief, the IRS system now automatically evaluates a taxpayer’s compliance history and suppresses the assessment of qualifying penalties without any required taxpayer intervention.

Who Qualifies for AEP Relief?

The eligibility standards for AEP closely mirror those of the old FTA program, rewarding consistent and voluntary compliance.

• Clean Compliance History: To qualify for AEP, taxpayers must have a history of timely filing and paying taxes for the prior three years, or 12 consecutive quarters for quarterly filers.
• Eligible Tax Periods: AEP applies to eligible 2025 tax year returns for individuals and 2026 quarterly returns for businesses.
• Covered Penalties: The AEP program covers failure-to-file, failure-to-pay, and failure-to-deposit penalties.

How the Process Works

When a tax return is processed, the IRS software scans the taxpayer’s history. If the criteria are met, the penalty is simply never assessed. Taxpayers who receive AEP relief will automatically be sent an IRS notice confirming that a penalty was not assessed due to their clean compliance history.

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Important Limitations to Remember

While the AEP program is a massive win for taxpayers, it is not a blanket waiver for all tax debts.

1. Underlying Debt Remains: The AEP program does not eliminate a taxpayer’s underlying tax liability or statutory interest owed to the IRS. You are still responsible for paying the principal tax amount.
2. Specific Exclusions: Not all tax returns are eligible. Information returns and returns filed for infrequent events, such as Form 706 (Estate Tax) and Form 709 (Gift Tax), generally do not qualify for AEP.
3. Reasonable Cause: If you do not meet the strict 3-year compliance rule for AEP, you may still qualify for penalty relief under traditional “reasonable cause” criteria (such as natural disasters or serious illness), but this still requires a manual request.

“By automatically applying penalty relief, the IRS recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.”

Automatic Exemption from Penalty (AEP) Program: Conclusion

The introduction of the Automatic Exemption from Penalty (AEP) program in 2026 marks a significant step toward a fairer, more efficient tax system. By eliminating the need to manually request First Time Abatement, the IRS is ensuring that compliant taxpayers automatically receive the penalty relief they deserve.

Paladini Law is a dedicated tax firm that provides counsel and representation to taxpayers and businesses. Attorney Brad Paladini is one of the few legal professionals in the region who holds a Master of Laws in Taxation and has effectively represented his client’s interests in any dealings with the IRS. To schedule a case review, please contact us or call 201-381-4472.

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