IRS Now Waives Penalties Automatically: What AEP Means for You

If you've ever filed a tax return a few days late — maybe you forgot an extension, or life just got in the way — you know the sting of an IRS penalty notice landing in your mailbox. The failure-to-file penalty alone can run 5% of your unpaid taxes per month, up to 25%. For someone who owes $3,000, that's $150 a month just for being late.

For years, there's been a little-known workaround called First Time Abate (FTA) that could get those penalties removed. The catch? You had to know it existed, call the IRS (good luck getting through), and specifically ask for it. Unsurprisingly, most people never did.

That just changed. On July 8, 2026, the IRS rolled out a brand-new program called the Automatic Exemption from Penalty, or AEP. And the best part is right there in the name: it's automatic.

What AEP Actually Does

AEP prevents certain IRS penalties from being assessed in the first place — no phone call, no form, no request needed. If you qualify, the IRS simply won't charge the penalty when it processes your return.

The penalties AEP covers include failure to file (you submitted your return late), failure to pay (you didn't pay your full tax bill by the due date), and failure to deposit (for businesses that missed a payroll tax deposit deadline).

When AEP applies, the IRS sends you a notice confirming that the penalty was waived because of your compliance history. You don't need to respond or do anything.

Who Qualifies

The eligibility rules are straightforward. You need three prior years of timely compliance, which means you filed your required returns on time and paid any tax due for the previous three tax years. For businesses filing quarterly returns, the requirement is 12 consecutive quarters of timely compliance.

That's it. No hardship letter. No documentation of why you were late. If you've been a responsible taxpayer for the past three years and you have a one-time slip, the IRS gives you a pass.

It's worth noting what AEP does not cover. Accuracy-related penalties (like understating your income), information return penalties, and daily delinquency penalties are all excluded. AEP is specifically for the timing-related penalties — filing late, paying late, or depositing late.

Why This Is a Big Deal

Here's the stat that puts this in perspective: according to the Taxpayer Advocate Service, about 220,000 taxpayers received First Time Abate relief through the old manual process in fiscal year 2025. TAS estimates that if AEP had been in place during the same period, over 1.5 million taxpayers would have received relief — roughly seven times as many.

That means more than a million taxpayers were likely eligible for penalty relief every year and never got it. Some didn't know FTA existed. Others couldn't get through to the IRS by phone. And many simply couldn't afford a tax professional to advocate on their behalf.

As the National Taxpayer Advocate noted in a July 2026 blog post, "relief should not depend on a taxpayer's income, ability to reach the IRS by phone, or access to professional representation." AEP directly addresses that problem.

The Transition Timeline

AEP is rolling out in phases, and the old First Time Abate program doesn't disappear overnight. Here's how the transition works.

What FTA Still Covers

If you have a penalty on a 2024 tax year return, FTA is still available — but you'll need to call the IRS and request it. The same goes for 2025 quarterly returns and any 2025 or 2026 returns that were processed before AEP went live.

When AEP Takes Over

AEP applies to eligible 2025 tax year returns and 2026 quarterly returns going forward. For any original return with a due date of January 1, 2027, or later, FTA will no longer be available at all — AEP fully replaces it.

What to Do If You Get a Penalty Notice

If you receive a penalty notice for a 2025 return and don't see a separate notice saying AEP was applied, don't assume you're out of luck. Call the IRS at the number on the notice and ask whether AEP, FTA, or reasonable cause relief applies to your situation. Have your notice, the penalty type, the tax year, and any supporting documentation ready when you call.

One Improvement Over the Old System

AEP fixes a frustrating quirk of the old FTA process. Under FTA, you could receive relief for a tax period, then have additional tax assessed later — and you'd have to call the IRS again to request relief on the new penalty. Under AEP, once relief is granted for an eligible tax period, the IRS won't assess covered penalties for that same period, even if additional tax is assessed later.

That small change eliminates a lot of back-and-forth that used to burn taxpayer time and IRS resources.

What AEP Doesn't Fix

No program is perfect. The Taxpayer Advocate Service has flagged one significant issue: AEP may be applied before the IRS considers whether you qualify for reasonable cause relief.

Why does that matter? Reasonable cause relief is a separate, statutory form of penalty abatement for situations where you exercised ordinary care but couldn't comply because of circumstances beyond your control — a natural disaster, serious illness, or death of a family member, for example.

If the IRS automatically applies AEP in a year when you actually qualified for reasonable cause, you've "used up" your AEP. Then, in a future year when you file late but don't have a reasonable cause, you won't have AEP available. TAS has recommended the IRS fix this interaction, and it's something to watch as the program matures.

How to Make AEP Work for You

The best strategy is the simplest one: keep filing and paying on time. Three consecutive years of clean compliance is your ticket to automatic penalty relief if you ever have a one-time slip.

Here are a few practical steps.

Automate what you can

Set up automatic payments for any estimated tax obligations. If you're self-employed and make quarterly payments, schedule them through IRS Direct Pay or EFTPS so you never miss a deposit deadline.

File even if you can't pay

The failure-to-file penalty (5% per month) is ten times steeper than the failure-to-pay penalty (0.5% per month). If you can't pay your full tax bill, file the return anyway and set up a payment plan. This keeps your compliance record clean for AEP purposes.

Check your compliance history

Log into your IRS Online Account at irs.gov to review your filing and payment history. If you see any gaps or issues from the past three years, address them now so you'll be eligible for AEP in the future.

Don't ignore penalty notices

Even with AEP in place, not every taxpayer will qualify, and not every penalty is covered. If you receive a notice, read it carefully. If you think you're eligible for relief, call the IRS and ask.

The Bottom Line

The IRS's new Automatic Exemption from Penalty is one of the most taxpayer-friendly changes in recent memory. It takes a process that used to require insider knowledge and a phone call you might never get through — and makes it automatic for anyone with a clean three-year track record.

If you've been filing and paying on time, you're already covered. And if you haven't, now is the time to start building that compliance history. Three years from now, you'll have a safety net you didn't have to ask for.