Beginning summer 2026, the new Automatic Exemption from Penalty (AEP) replaces the First Time Abatement (FTA) policy for taxpayers with a history of timely compliance. Returns eligible for AEP relief include 1040, 1065, 1120, CT-1, 940, 941, 943, 944, and 945. Penalties eligible for AEP relief include failure to file, failure to pay, and failure to deposit. AEP applies to tax year 2025 returns, 2026 quarterly returns, and for all future tax years. FTA will continue to apply to tax year 2025 returns and 2026 quarterly returns not considered for AEP, as well as prior year returns.
Taxpayers are eligible for AEP relief for late filing or paying if the taxpayer has timely filed and paid the specific return for the prior three years or twelve consecutive quarters, and no penalty has been assessed or any assessed penalty was abated for reasonable cause or IRS error. Additional requirements apply for business returns, which includes the 94X series. For business returns, the IRS must not have waived the failure to deposit penalty four or more times during the prior three years or twelve consecutive quarters and the failure to deposit penalty must not have been charged for Electronic Federal Tax Payment System avoidance.
One key difference for failure to pay penalties under the AEP is that the penalty will not accrue or be assessed on unpaid tax, where it previously could accrue under FTA until the tax is fully paid.
There are also several important procedural differences between the FTA and AEP. Under the FTA, taxpayers were first assessed a penalty, then taxpayers had to contact the IRS to request relief. Relief was not automatically applied. Under the AEP, taxpayers will not be assessed a penalty and will not need to contact the IRS to request relief. Relief will be automatically applied for eligible taxpayers. Taxpayers that are granted AEP relief will receive a letter explaining that the relief was applied due to the taxpayer’s history of timely compliance. Taxpayers should contact the IRS if they receive a notice showing an assessed penalty but believe they qualify for AEP relief.
More information about the AEP can be found here.
