The IRS Is Making Some Penalty Relief Automatic

The IRS began rolling out a new automatic penalty-relief process during the summer of 2026. Announced on July 8, 2026, the Automatic Exemption from Penalty program, or AEP, can prevent certain late-filing, late-payment, and late-deposit penalties from being assessed against otherwise compliant taxpayers.

The rollout has already started and applies beginning with eligible 2025 annual returns and 2026 quarterly returns. Some individuals and businesses with an isolated compliance problem may now receive relief automatically instead of having to request it after a penalty appears. Because 2026 is a transition year, however, taxpayers whose returns were processed before AEP became available could still receive a penalty notice and need to request First Time Abate.

AEP is welcome news for taxpayers with a strong compliance history, but it is not an extension of a tax deadline. It does not eliminate the underlying tax, stop interest from accruing, or excuse every type of penalty.

What Is the Automatic Exemption From Penalty?

AEP is administrative relief for taxpayers who generally file and pay on time but experience a one-time compliance problem. If the requirements are met, the IRS may refrain from assessing certain penalties while processing the original return, with no separate application required.

AEP can potentially cover three common penalties:

• Failure to file
• Failure to pay
• Failure to deposit employment taxes

When relief is granted, the IRS should send a notice explaining that the penalty was not assessed because of the taxpayer’s prior compliance history.

Who May Qualify?

Eligibility is based largely on prior compliance. For annual returns, taxpayers generally must have timely filed the same type of return and paid the tax due during the previous three years. For quarterly returns, such as payroll tax returns, the IRS generally reviews the previous 12 consecutive quarters.

Eligible return series include certain individual, partnership, corporate, employment, and railroad retirement tax returns. AEP begins with eligible 2025 annual returns and eligible 2026 quarterly returns.

Not every return or taxpayer will qualify. Returns filed only occasionally because of a particular event, such as certain estate and gift tax returns, generally are not eligible.

How Is This Different From First Time Abate?

First Time Abate has historically allowed taxpayers with a good compliance history to request relief after a penalty was assessed. With AEP, the IRS reviews eligibility while processing the original return, potentially preventing the penalty from being assessed in the first place.

The two systems will temporarily overlap during the 2026 transition. First Time Abate may remain available for eligible 2025 annual returns and 2026 quarterly returns that were processed without AEP consideration.

From that point forward, qualifying relief will generally be considered automatically while the original return is processed.

What AEP Does Not Eliminate

The word ‘automatic’ can be misleading. AEP does not extend filing, payment, or deposit deadlines, and it does not eliminate the underlying tax. A taxpayer may still owe interest, estimated-tax penalties, accuracy-related penalties, information-return penalties, or other amounts outside the program.

AEP is designed to provide relief for an isolated compliance failure. It is not a planning tool for intentionally delaying a return or tax payment.

What Should You Do if You Receive a Penalty Notice?

A penalty notice should be reviewed rather than automatically paid or ignored.

Start by confirming:

• The return, tax period, and specific penalty involved
• Whether the return was filed and the tax was paid
• Whether the taxpayer had the required compliance history
• Whether AEP, First Time Abate, or reasonable-cause relief may apply

Because AEP relies on IRS records and 2026 is a transition year, an eligible taxpayer could still receive a penalty notice. Taxpayers who believe relief should apply may need to contact the IRS using the instructions on the notice. Those who do not qualify for AEP may still be able to request reasonable-cause relief.

Why Compliance History Is Becoming More Valuable

Three years of timely annual compliance, or 12 consecutive quarters for quarterly filers, can become valuable protection when an isolated mistake occurs. Business owners should make compliance part of their risk-management process by:

• Maintaining a reliable filing calendar
• Monitoring payroll tax deposits
• Retaining proof of electronic payments
• Reviewing IRS notices promptly

These practices can prevent penalties while preserving access to relief when something unexpected happens.

The Bottom Line

The Automatic Exemption from Penalty is a meaningful improvement for generally compliant taxpayers. Qualifying individuals and businesses may have certain failure-to-file, failure-to-pay, or failure-to-deposit penalties prevented automatically during return processing.

This article is for general educational purposes and does not constitute tax, legal, accounting, or financial advice. Eligibility for penalty relief depends on the taxpayer’s filing history, return type, tax period, and individual circumstances.