IRS Introduces Automatic Exemption from Penalty Program

FOLSOM, Calif., Nov. 10, 2026 /CourierPR/ -- The Internal Revenue Service (IRS) has introduced a new program called the Automatic Exemption from Penalty (AEP) to replace the First-Time Abate (FTA) program. The AEP aims to automatically exempt eligible taxpayers from certain late-filing and late-payment penalties, provided they have a clean compliance record over the past three years.

According to the IRS, taxpayers with three prior years of timely compliance may qualify for automatic relief from certain penalties. However, the AEP is not always the best relief option, and the reason a penalty is removed can affect future relief options. Tax professionals at TaxAudit caution that taxpayers who also qualify for reasonable-cause relief should verify which relief the IRS applied, as it may limit their options in a later year.

The AEP applies only to specified eligible original returns, including Forms 1040, 1065, and 1120-S. Employers may also qualify for failure-to-deposit relief on eligible employment returns such as Forms 941, 940, and 944. Quarterly payroll filers generally need 12 consecutive compliant quarters and must meet other requirements to qualify. AEP does not cover all penalties, such as the daily delinquency, accuracy-related, information-return, or estimated tax penalties. Tax, interest, and uncovered penalties remain due.

Before the AEP, the IRS's FTA program offered administrative relief based on compliance history. Eligible individuals could have failure-to-file and failure-to-pay penalties waived after three compliant years, but they had to request it. Many taxpayers missed relief because they did not know to ask, leaving them with avoidable penalties and interest.

The IRS began introducing AEP in mid-2026 to replace FTA for eligible returns. Both programs require three years of filing and payment compliance. With upgraded systems, the IRS can now identify qualifying taxpayers as an original return is processed, automatically waive covered penalties, and send a notice. After receiving AEP relief, a taxpayer must again satisfy the three-year compliance requirement before qualifying for another AEP abatement.

The transition period from the FTA program to the AEP program is ongoing. The IRS announced AEP on July 8, 2026, without specifying when the transition began. Available guidance says FTA continues for 2024 and earlier returns, and for eligible 2025 returns processed before AEP began. AEP applies to eligible 2025 returns processed afterward. For eligible original returns due on or after January 1, 2027, AEP replaces FTA, but all eligibility requirements still apply. Taxpayers filing during the transition may want to confirm which relief was applied, which can be done by calling the IRS. Additionally, taxpayers can download a Record of Account transcript from their IRS online account.

The AEP program has its limitations. For example, a taxpayer named Tony faced a situation where he missed the 2024 Form 1040 filing deadline due to a fire that destroyed his home and records. He filed his 2024 return late, owed $2,500, and requested reasonable-cause relief. However, because his previous three years were compliant, the IRS granted an FTA instead. In 2025, Tony missed the return filing deadline again and filed and paid in July 2026. His oversight did not establish reasonable cause, and FTA was unavailable because it had been used for 2024.

The AEP makes relief easier to receive, but taxpayers should confirm that today's relief does not unnecessarily limit tomorrow's options. The IRS may resist reconsidering the basis for relief, but taxpayers may appeal and ask the agency to evaluate reasonable cause when their facts support it.