The Internal Revenue Service (IRS) has implemented a new program called the Automatic Exemption from Penalty (AEP) to streamline and expand access to penalty relief for eligible taxpayers who have a clean compliance history but incur certain penalties for the first time. The AEP program eliminates the need to actively seek penalty waivers under the First Time Abate (FTA) policy first implemented in 2001.
What Is the IRS AEP Program?
Under the AEP Program, the IRS will automatically evaluate eligibility during return processing and “suppress” the applicable penalty (i.e., reflect it as $0) instead of requiring taxpayers to affirmatively request relief under FTA. Taxpayers will be issued a notice informing them that automatic relief has been applied.
It is important to note the AEP program is prospective only, and applies to eligible original tax year 2025 returns, 2026 quarterly returns, and future filing periods. The AEP program applies to taxpayers eligible for FTA, meaning they have timely filed returns and paid liabilities for the preceding three tax years (12 consecutive quarters for quarterly filers). Taxpayers eligible for AEP are relieved of the failure to file, failure to pay, and failure to deposit penalties covered by FTA. As with FTA, information returns, estate and gift tax returns, and certain returns reporting only specific transactions are generally ineligible for the AEP program.
IRS AEP Implementation Timeline and Transition From First Time Abate
The IRS announced the change to the AEP program on July 8, 2026, and indicated that there would be a “phased transition” from FTA. Accordingly, some taxpayers may still receive penalty notices before full implementation, which is expected to occur beginning with returns having original due dates on or after January 1, 2027. The IRS is encouraging taxpayers who receive penalty notices and believe they qualify for FTA to request it through existing administrative channels.
Key Taxpayer Considerations for the New Automatic Penalty Relief Program
- Implementation of the AEP program does not eliminate the need to carefully review IRS notices. During the implementation process, taxpayers otherwise eligible for the program will still receive penalty notices and will need to affirmatively request relief.
- The AEP program should reduce taxpayers’ administrative burden. Eligible taxpayers will no longer need to affirmatively request FTA for qualifying penalties.
- Taxpayers should continue to maintain a strong compliance history, as it remains the linchpin of automatic penalty relief.
- The AEP program does not expand the universe of penalties and returns qualifying for automatic relief. Where appropriate, taxpayers should continue evaluating other types of penalty relief, including reasonable cause.
How the AEP Program Supports Tax Compliance and Taxpayer Fairness
The National Taxpayer Advocate (NTA), Erin M. Collins, commented on the AEP program in her blog post on July 9, 2026. According to the NTA, AEP will provide relief to hundreds of thousands of taxpayers, reduce unnecessary contacts with the IRS, and free up IRS employees to work on other issues. Removing penalties for taxpayers who have a good compliance record, but who may have made a mistake in timely filing or paying, recognizes and rewards taxpayers doing the right things. The penalties remain applicable for other taxpayers who are not consistent in timely paying their taxes and filing their tax returns.
Your Guide Forward
While the AEP program simplifies penalty relief for many taxpayers, determining eligibility and navigating the transition period may still present challenges. Cherry Bekaert's Tax Controversy team can help evaluate penalty notices, assess qualification for AEP or other relief provisions, and assist with requests for penalty abatement when necessary. We work with taxpayers to resolve IRS disputes efficiently and maintain compliance strategies that help minimize future penalty exposure.
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