The Internal Revenue Service has announced an important change that will make penalty relief easier for millions of taxpayers. Beginning in Summer 2026, the IRS will begin implementing a new Automatic Exemption from Penalty (AEP) program, replacing the long-standing First Time Abate (FTA) process for many taxpayers.
What Is Changing?
Under the previous First Time Abate (FTA) program, taxpayers who qualified for relief from certain IRS penalties had to know the program existed and then contact the IRS to request the waiver. In many cases, eligible taxpayers missed out simply because they were unaware of the program or did not know how to request it.
With the new Automatic Exemption from Penalty (AEP), the IRS will determine eligibility automatically during the processing of an original return. If you qualify, the applicable penalty simply will not be assessed—no phone calls, letters, or special requests required.
Who May Qualify?
To qualify for AEP, taxpayers generally must have:
- A history of timely filing their tax returns for the previous three tax years (or 12 consecutive quarters for quarterly filers).
- Timely paid any taxes due during that compliance period.
- Filed an eligible original return.
Which Penalties Are Covered?
The new program may automatically waive certain penalties, including:
- Failure-to-File Penalties
- Failure-to-Pay Penalties
- Failure-to-Deposit Penalties (primarily affecting businesses)
Which Returns Are Eligible?
The AEP program generally applies to:
- Individual income tax returns (Form 1040)
- Partnership returns (Form 1065)
- Corporate income tax returns (Form 1120)
- Many employment tax returns, including Forms 940, 941, 943, 944, 945, and CT-1.
However, some returns—such as estate tax returns, gift tax returns, many information returns, and certain event-based filings—are not eligible for automatic relief.
Important Things to Remember
While this is welcome news, there are several important limitations:
- The tax itself must still be paid.
- Interest on unpaid taxes still applies.
- Not every IRS penalty qualifies for automatic relief.
- Taxpayers who do not qualify for AEP may still request penalty relief based on reasonable cause, just as they can today.
When Does It Take Effect?
The IRS will begin implementing AEP during Summer 2026 for eligible 2025 income tax returns and 2026 quarterly returns. During the transition period, some taxpayers may still receive penalty notices and need to request traditional First Time Abate relief if AEP has not yet been applied. For original returns with due dates on or after January 1, 2027, AEP is expected to replace First Time Abate for eligible returns.
What This Means for You
The new Automatic Exemption from Penalty is a significant improvement in IRS customer service. Taxpayers with a strong history of compliance will no longer have to know about a special relief program or spend valuable time contacting the IRS to request a waiver. Instead, the IRS will recognize their good filing history and automatically provide the relief when appropriate.
This change is expected to benefit well over one million taxpayers annually, making the penalty relief process simpler, fairer, and more efficient.
Conclusion
Although the new AEP program is a welcome change, it should not be viewed as a reason to file or pay late. The best way to avoid penalties and interest remains filing your tax returns on time, paying your tax liability when due, and maintaining a strong compliance history.
If you receive an IRS notice assessing a penalty or have questions about whether you qualify for penalty relief, please contact Penrose & Associates, LLC. We will review your situation and help determine the most effective course of action.