IRS Update: Eligible Taxpayers May Receive Automatic Penalty Relief

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Taxpayers with a consistent history of filing and paying on time may soon receive penalty relief without having to ask for it. 

On July 8, 2026, the IRS announced a new process called the Automatic Exemption from Penalty (AEP), which will replace the long-standing First Time Abate (FTA) program. AEP is designed to reduce taxpayer burden by removing the need to contact the IRS to request relief, and it applies to eligible returns beginning with the 2025 tax year.

What Is Automatic Exemption from Penalty (AEP)?

AEP is an IRS-initiated relief process. Rather than requiring a taxpayer to call or write to the IRS to request abatement of certain penalties, the IRS identifies eligible taxpayers during return processing and withholds the penalty assessment automatically.

• AEP is relief based on taxpayer compliance history, not on individual circumstances.
• AEP is not the same as reasonable cause relief; reasonable cause requires a factual paper trail explaining why payments or filings were missed. AEP does not hold those requirements.
• Taxpayers who don’t meet AEP’s eligibility criteria may still qualify for relief through the reasonable cause process, covered later in this article.

IRS CEO Frank J. Bisignano stated the change “reflects the IRS’ commitment to making the payment of taxes owed simpler and more consistent”, supporting the view that “taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted”.

Who Qualifies for AEP

AEP applies to eligible original returns starting with the 2025 tax year and 2026 quarterly returns and future tax periods.

• Eligibility window: A history of filing on time and paying any tax due for the past three years or 12 consecutive quarters (for quarterly filers).
• Penalties covered:
  • Failure to file
  • Failure to pay
  • Failure to deposit
• Returns generally excluded: Returns typically filed only in response to a specific transaction or infrequent event, such as Form 706 (U.S. Estate Tax Return) or Form 709 (Gift Tax Return). Taxpayers who file these forms should not assume AEP will apply.

How the Process Works

The process for AEP qualification is simple, almost non-existent on the taxpayer’s end. There is nothing to submit, but if you are eligible and the IRS confirms your compliance history, you can expect to receive a notice or letter confirming that relief is being granted. 

One of the most notable aspects of AEP is that it requires no action from the taxpayer side.

This shifts responsibility for identifying eligible taxpayers to the IRS itself, rather than placing the burden on the taxpayer to recognize their own eligibility and prove it by submitting a request.

Keep in mind that AEP relief is limited in scope; while it prevents the assessment of certain penalties, it does not eliminate the underlying tax liability. Taxpayers must still pay any tax owed, along with applicable interest, and any penalties that fall outside the scope of AEP relief.

The Transition Period: What Changes and When

AEP is not replacing First Time Abate overnight. The IRS has outlined a transition period during which both processes will coexist.

AEP will fully replace First Time Abate for eligible returns with original due dates on or after January 1, 2027. During this transition, some taxpayers who qualify for penalty relief may still receive a penalty notice in error, since the two systems are being phased in together.

Taxpayers who believe they qualify but receive a penalty notice for a 2025 or 2026 return may still contact the IRS to request First-Time Abatement directly during this period.

Why This Update Matters

For taxpayers and businesses that consistently file and pay on time, AEP represents a meaningful reduction in administrative friction.

• Eligible taxpayers can expect relief to be applied during processing itself, with a confirming notice rather than a penalty notice.
  
• This change reinforces the value of maintaining a clean, on-time filing history, since a single missed deadline can affect eligibility for future relief.
  
• Filing accurately and on time, every period, is what keeps a taxpayer positioned for this kind of automatic protection.

This is where working with a reliable e-file provider becomes especially valuable. TaxBandits helps individuals and businesses file federal tax forms accurately and on time, supporting the exact compliance history that the IRS now rewards with automatic penalty relief under AEP. 

For taxpayers navigating multiple filing deadlines throughout the year, having a dependable filing process in place is one of the simplest ways to stay eligible for this and other IRS relief programs going forward.

Final Thoughts

The introduction of AEP marks a meaningful shift in how the IRS handles penalty relief for compliant taxpayers. By automatically identifying eligible filers during processing, rather than requiring them to initiate a request, the IRS is reducing administrative burden for those with a strong track record of on-time filing and payment.

As the transition from First Time Abate continues through 2026 and into 2027, taxpayers should understand where they stand under the new eligibility criteria and continue maintaining accurate, timely filing habits, since this history is what determines eligibility for automatic relief in the first place.

For those who fall outside AEP’s scope, reasonable cause relief remains a dependable alternative, ensuring that no eligible taxpayer is left without a path to penalty relief. As tax reporting requirements continue to evolve, stay informed about the 2026 Form 1099 updates and the One Big Beautiful Bill Act (OBBBA) to prepare for the latest reporting and compliance changes.