IRS Automatic Exemption from Penalty (AEP)

Quick Answer

The IRS Automatic Exemption from Penalty (AEP) is an administrative program that prevents assessment of certain failure-to-file, failure-to-pay, and failure-to-deposit penalties during original-return processing when you have a timely compliance history.

If you may qualify, the IRS applies AEP systemically. You do not need to call, file Form 843, or request relief for AEP itself.

• Same return type timely filed for the prior three tax years (annual filers) or 12 consecutive quarters (quarterly filers), with no breaking penalties in that period (estimated tax penalties do not break the lookback; penalties later abated for reasonable cause or IRS error also do not).
• Phase 1 (summer 2026) covers eligible 2025 tax year returns and 2026 quarterly returns. Phase 2 (2027) is expected to apply more broadly to 2026 tax year returns.
• For original returns with due dates on or after January 1, 2027, AEP replaces First Time Abate (FTA).
• AEP does not erase tax, interest, or non-covered penalties. Keep filing and paying on time. Tax results vary by circumstances.

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Received a Penalty Notice?

Here's the bottom line in regards to a notice you already received during the AEP rollout:

1. Call the IRS number printed on your notice first. Have the notice, tax year or period, penalty type, and your compliance history ready. Some 2025 returns and 2026 quarterly returns processed before AEP was live for that return type may still show assessed penalties; relief in those cases is not automatic and may require a First Time Abate (FTA) or other request.
2. If phone resolution fails, consider submitting Form 843, Claim for Refund and Request for Abatement, with a clear explanation and supporting documentation.
3. For help understanding options (self-service paths, installment agreements, penalty abatement, Currently Not Collectible, or Offer in Compromise when appropriate), contact Get Tax Relief Now at (888) 260-9441 or visit /contact. Free IRS and self-service options come first; paid representation is optional.

Related announcement coverage: /news/aep-automatic-penalty-relief

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What Is the IRS Automatic Exemption from Penalty (AEP)?

On July 8, 2026, the IRS announced the Automatic Exemption from Penalty program through IR-2026-83, with supporting detail in Fact Sheet FS-2026-12 and on the IRS administrative penalty relief pages.

Here's the bottom line in regards to what AEP does: it is designed to suppress covered penalties before assessment when original returns are processed and the taxpayer meets the compliance-history rules. That is different from First Time Abate, where a penalty is often assessed first and then removed after the taxpayer contacts the IRS.

IRS Chief Executive Officer Frank J. Bisignano stated in the July 8, 2026 release:

"By automatically applying penalty relief, the IRS recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted."

Keep in mind that AEP is administrative relief, not a statutory repeal of penalty law. The IRS has been clear that AEP does not eliminate penalties under the law. You should continue to file required returns, pay tax, and make deposits by the due date. Tax, interest, and penalties outside AEP's covered list still apply.

If AEP applies, the IRS sends a notice explaining that the penalty was not assessed because of your three prior years (or equivalent quarterly history) of timely compliance. No response to that notice is required.

In other words: when the system works as described, eligible taxpayers avoid the phone tree, Form 843, and the "assess then abate" cycle for covered penalties on that original return processing run.

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How AEP Differs from First Time Abate (FTA)

FTA has been the most common administrative relief path for individuals and businesses with a history of timely compliance. AEP is built to replace that manual model for returns that fall under the new rules - especially original returns with due dates on or after January 1, 2027, when FTA is no longer available for those returns.

It should be noted that FTA continues for certain earlier periods (for example, eligible 2024 tax year returns, eligible 2025 quarterly returns, and eligible 2025/2026 returns processed before AEP is live for the relevant return type), per IRS fact sheet guidance. During the transition, both programs may matter depending on when your return was processed.

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AEP vs. FTA comparison

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One-time-per-tax-period note (NTA): National Taxpayer Advocate Erin M. Collins has explained that AEP also should prevent repeated taxpayer contacts for the same tax period—even if additional tax is later assessed or the tax is not fully paid. Under FTA, a taxpayer could receive relief, later face additional tax, and need to contact the IRS again. Treat this as the NTA's description of how AEP should work; do not treat it as a personal guarantee for every edge case until your account reflects the result.

Scale context (estimate, not a promise of your result): In fiscal year 2025, nearly 220,000 taxpayers received FTA relief through the manual process. TAS estimates that if AEP had been in place for the same period, over 1.5 million taxpayers would have received penalty relief—about seven times as many. The roughly 85% gap is an extrapolation from that TAS estimate, not a measured count of people who "would have called." Actual 2026–2027 beneficiary counts depend on rollout, processing, and eligibility.

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Who May Qualify?

Use "may qualify"—not "you qualify" or "you are eligible." Only the IRS systems and your actual filing history determine the outcome.

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Core compliance history

You may qualify for AEP if, for the same return type as the original return being processed:

1. Annual filers: The same return type was timely filed for the prior three tax years.
2. Quarterly filers: You have 12 consecutive quarters of timely filing of the same return type.
3. Penalties in the lookback: No penalty was assessed in the lookback period other than the estimated tax penalty, or any penalty that was assessed was later abated for reasonable cause or IRS error.
4. Estimated tax penalty: The estimated tax penalty does not break the clean compliance history for AEP lookback purposes.
5. Return type: You are filing an eligible return series (see Eligible Return Types below).
6. Business extras (when applicable):
   • No failure-to-deposit (FTD) penalty waiver 4 or more times in the prior three years / 12 quarters; and
   • The FTD penalty was not charged for EFTPS avoidance.

Keep in mind that AEP is described as applying during original-return processing. Amended-return and substitute-for-return edge cases are not fully spelled out in the July 2026 AEP materials; if your facts are nonstandard, the IRS has not published complete AEP-specific rules for every scenario.

Annual filer example (illustrative only)

Suppose you file Form 1040. For tax years 2022, 2023, and 2024 you filed on time and any rare penalty was limited to estimated tax or was later abated for reasonable cause. In 2025 you file late. When the IRS processes that original 2025 return under Phase 1 AEP rules, covered failure-to-file and/or failure-to-pay penalties may be suppressed before assessment if the system matches you to the clean same-return-type history. You would still owe tax and interest as applicable.

Quarterly filer example (illustrative only)

Suppose you file Form 941. You need 12 consecutive quarters of timely same-return-type filing under the AEP lookback framing. A single breaking FTD pattern that violates the business extras (for example, four or more FTD waivers in the lookback, or an EFTPS-avoidance FTD) can put business deposit relief out of reach even if filing history otherwise looks clean.

Business taxpayers extra filters

Business taxpayers may face AEP on failure to file, failure to pay, and failure to deposit (individuals are framed around failure to file and failure to pay in NTA summary language). The two extra FTD filters matter:

• Four-or-more FTD waivers in the lookback: repeated administrative FTD waivers can block AEP even when other history looks acceptable.
• EFTPS avoidance FTD: an FTD charged because deposits were not made through the required electronic system is treated as disqualifying for the business FTD side of the rules as published.

In other words, "clean history" for a payroll taxpayer is not only "I eventually paid." It includes how deposits were made and how often FTD relief was already used.

What does not prove qualification by itself

• Paying the balance in full after the due date does not automatically create AEP.
• Having used FTA in a prior decade does not, by itself, answer the current three-year / 12-quarter test.
• Reasonable cause facts (illness, disaster, IRS error, and similar) are a separate statutory path. If your facts support reasonable cause, do not assume silent acceptance of AEP is always the better long-term choice � see the reasonable-cause displacement discussion on the full explainer in Pass 2 context and in IRS/NTA primary materials. Affirmatively requesting reasonable cause when facts support it remains important.

Transition gap (common failure mode)

Some taxpayers who would otherwise meet the history test may still receive penalty notices on eligible 2025 returns or 2026 quarterly returns if the return was processed before AEP was available for that return type. Relief is not described as retroactive to already-processed returns. In that situation, contact the IRS using the number on the notice and be prepared to request FTA (or other applicable relief). Form 843 remains a backup if phone resolution fails.

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Covered Penalties

AEP generally applies only to the penalty categories the IRS lists for the program. Rates below are statutory context from the Internal Revenue Code so you can see what is being suppressed - not a calculator of your balance.

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By taxpayer type (summary framing from NTA/IRS materials):

• Individuals: failure to file and failure to pay (covered categories).
• Businesses: failure to file, failure to pay, and failure to deposit (covered categories), subject to the business FTD extras above.

Here's the bottom line in regards to the minimum figure: use the Code's inflation-adjusted minimum (lesser of that amount or 100% of tax) for the late-filed return FTF minimum after 60 days. For returns required to be filed in 2026, Rev. Proc. 2024-40 sets the amount at $525 � not older $435 figures still circulating online.

AEP prevents assessment of covered penalties when the systemic rules are met. It does not pay your tax for you, and it does not stop interest on underpaid tax under the normal interest rules.

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Excluded Penalties

AEP does not apply to every IRS penalty. Per FS-2026-12 and related IRS materials, examples of exclusions include:

• Daily Delinquency Penalty (DDP)
• Accuracy-related penalties under IRC § 6662

• Information return penalties
• Estimated tax penalties (IRC §§ 6654 / 6655) - also specifically excepted from breaking the AEP lookback, but not relieved by AEP as a covered penalty

• Fraud penalties (including the fraud-enhanced failure-to-file framework under IRC § 6651(f) in the Code structure)

• Other penalties not covered by AEP

If your notice cites accuracy-related, information-return, DDP, estimated tax, or fraud-type penalties, do not expect AEP to clear those items. Other paths (reasonable cause where available, correction of underlying reporting, installment agreement for the tax balance, and so on) may still matter.

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Excluded Returns

AEP is aimed at ordinary income and employment/railroad return series—not every form the IRS receives.

Excluded or outside the AEP return set as described in IRS materials:

• Form 706 (estate tax) and other event-based / infrequent estate filings in that category
• Form 709 (gift tax)
• Information returns
• Filings described as information reporting dependent on another filing

In other words, a clean three-year Form 1040 history does not convert an estate or gift tax delinquency into an AEP event. Those regimes stay outside this administrative waiver.

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Eligible Return Types

Per IRS administrative penalty relief guidance, AEP is framed around these eligible series when other rules are met:

CategoryFormsIncome tax returnsForm 1040, Form 1065, Form 1120Employment tax returnsForm 940, Form 941, Form 943, Form 944, Form 945Railroad retirementForm CT-1

Keep in mind:

• "Same return type" is part of the lookback test. Switching entity or return series mid-history (for example, sole proprietor Schedule C history versus a new corporation's Form 1120) is not fully mapped in the July 2026 AEP publications. The IRS has not published a complete edge-case matrix for entity transitions.
• Phase 1 (summer 2026): eligible 2025 tax year returns and 2026 quarterly returns.
• Phase 2 (2027): AEP expected to apply more broadly to 2026 tax year returns (NTA framing).
• On or after January 1, 2027: for eligible returns with original due dates on or after that date, AEP replaces FTA entirely for those returns.

If your form is not on the eligible list, AEP is not the program to rely on. Reasonable cause, other administrative relief where available, and resolution of the underlying tax remain the practical paths.

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The Transition Period (Summer 2026 Through December 31, 2026)

Here's the bottom line in regards to the rollout window: AEP is live in phases, not overnight for every return type.

What the IRS has said:

• Phase 1 (summer 2026): AEP applies to eligible 2025 tax year returns and 2026 quarterly returns.
• Phase 2 (2027): AEP is expected to apply more broadly to 2026 tax year returns.
• Hard cutoff: For original returns with due dates on or after January 1, 2027, AEP replaces First Time Abate. FTA is no longer available for those returns.
• FTA still matters for eligible 2024 tax year returns, eligible 2025 quarterly returns, and eligible 2025/2026 returns processed before AEP was live for that return type.

The transition trap: If your return was processed before AEP was available for that return type, you may still receive a penalty notice even if your compliance history would have supported AEP. Relief is not described as retroactive to already-processed returns. Call the number on the notice. Request FTA or other applicable relief. If phone resolution fails, Form 843 remains the written path.

Keep in mind that "summer 2026" is not a single public go-live timestamp by form number. When in doubt, treat the notice in your hand as the controlling document and contact the IRS using the phone number printed on it.

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Reasonable Cause vs. AEP — The National Taxpayer Advocate's Concern

This is the section most generic AEP articles skip. It is also the section that matters most if your facts are more than a simple one-time slip.

Two different kinds of relief

• Reasonable cause is grounded in statute. For failure to file and failure to pay, IRC section 6651(a) provides that the penalty applies unless the failure is due to reasonable cause and not due to willful neglect. Failure-to-deposit has its own reasonable-cause framework under IRC section 6656.
• AEP is an administrative waiver. It is not a rewrite of the Code. It is IRS systems and administrative policy suppressing covered penalties when lookback rules are met.

What the NTA said

National Taxpayer Advocate Erin M. Collins supported automatic relief for compliant taxpayers. She also flagged a structural problem:

"Before implementation, IRS leadership had agreed in writing on an approach that would preserve reasonable cause relief while still allowing the IRS to provide automatic penalty relief. Unfortunately, the IRS changed course and created an approach under which administrative relief will displace reasonable cause relief."

In other words: if the system applies AEP in a year when you could have established reasonable cause, you may use administrative protection for that period � and lose the ability to preserve AEP for a later year when reasonable cause does not apply.

Year 1 / Year 3 scenario (illustrative)

1. Year 1: You file late because of a documented medical emergency. Facts support reasonable cause. The system may still apply AEP automatically and suppress the covered penalty without a reasonable-cause determination.
2. Year 3: You file late again because of a calendar mistake. Reasonable cause is weak or unavailable. AEP lookback may already treat Year 1 as using administrative relief. Result: you may have neither AEP nor a strong reasonable-cause path for Year 3.

What you can do today

If your circumstances support reasonable cause — death or serious illness, natural disaster or casualty, inability to obtain records, IRS error, and similar facts — consider affirmatively requesting reasonable cause relief rather than passively accepting AEP alone. Document the facts. Keep copies.

It should be noted that the IRS has not published a simple taxpayer switch that says "apply reasonable cause instead of AEP after AEP already posted." The NTA has recommended a substitution mechanism. Until that exists, professional judgment and timely written requests matter.

For a deeper walkthrough of reasonable cause standards and documentation, see: Understanding IRS Reasonable Cause: Your Guide to Penalty Relief.

Primary sources: NTA Blog (July 8, 2026); IRS Penalty Relief for Reasonable Cause; IRC sections 6651 and 6656.

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What the Data Does Not Show

Primary IRS and TAS materials do not currently publish:

• First Time Abate denial rates
• Demographic breakdown of the estimated 1.5 million figure (income, geography, filing type)
• Average penalty dollars that AEP would suppress
• IRS revenue impact estimates for forgone penalties
• A public AEP live-date tracker by return type
• Confirmed appeal procedures unique to AEP system denials
• A rulebook for amended returns, SFR interaction, or entity-type transitions mid-lookback

The 220,000 to 1.5 million comparison is a TAS estimate of who would have received relief if AEP had existed in FY2025. The roughly 85% gap is an extrapolation, not a headcount of people who were denied.

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What If You Don't Qualify for AEP?

Not meeting AEP lookback rules does not end the analysis. Here's the bottom line in regards to the practical order of options:

1. Reasonable cause (when facts support it)

Request relief under the statutory standard with documentation. See the IRS reasonable cause page and the GTRN guide linked above.

2. Installment agreement

If you cannot pay the tax in full, a payment plan may be available. While failure-to-pay can continue during an installment agreement, the FTP rate is reduced to 0.25% per month under the statutory installment framework (separate from AEP). Estimate penalty exposure with the IRS penalty abatement calculator.

3. First Time Abate (transition periods only)

For periods still under FTA, contact the IRS using the number on the notice.

4. Appeal rights (general penalty relief)

When the IRS denies FTA or reasonable cause relief, general appeal rights to the Independent Office of Appeals may apply as described on your notice. Whether the same appeal rights extend to AEP system denials specifically has not been clarified in the July 2026 AEP materials. Do not assume an automatic Tax Court path from AEP alone.

5. Currently Not Collectible (CNC)

If full payment would create economic hardship, CNC status may suspend collection. It does not erase tax or penalties by itself.

6. Offer in Compromise (last resort)

OIC may be available only when strict criteria are met. Most taxpayers will not qualify. Treat it as a last option, not the default pitch.

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What If You Receive a Penalty Notice Despite Believing You Qualify?

1. Read the notice. Identify penalty type, tax period, amount, and the phone number on the notice.
2. Gather your history. Prior-year transcripts, e-file acknowledgments, and payment records help - but the IRS systems make the final AEP determination.
3. Call the IRS number on the notice. Ask about Automatic Exemption from Penalty and, if needed, First Time Abate.
4. If facts support reasonable cause, say so. Do not limit the call to "I think I get AEP."
5. If phone resolution fails, file Form 843 with a written explanation and supporting documents.
6. If the IRS issues an adverse determination, follow the appeal instructions on the notice for general penalty relief. AEP-specific appeal procedures remain incompletely published.
7. Free help: Taxpayer Advocate Service at 1-877-777-4778 when you face systemic delay or hardship criteria.
8. Optional professional help: (888) 260-9441 or /contact for multi-period, business, or mixed federal/state cases.

Do not ignore the notice. Unaddressed penalties can escalate into collection action even when you believe the assessment was wrong.

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A Note on State Tax Penalties

AEP is a federal IRS program. It does not automatically clear state penalties.

Each state runs its own penalty and abatement rules. Some states have first-time-style administrative relief; many rely primarily on reasonable cause or other state procedures. Federal AEP does not substitute for a state waiver request.

If you have both IRS and state penalties, treat them as separate problems with separate agencies, forms, and deadlines.

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Need Help Sorting AEP, FTA, and Reasonable Cause?

If you received a penalty notice, are unsure whether AEP should have applied, or need help documenting reasonable cause or a payment plan:

• Start with the free IRS path: the number on your notice, IRS Online tools where available, and TAS at 1-877-777-4778 when appropriate.
• For a professional review of multi-year or business penalty exposure, call (888) 260-9441 or use our contact page.

We can help you:

• Map whether AEP, FTA, or reasonable cause is the better path under your facts
• Prepare penalty abatement requests and supporting evidence
• Evaluate installment agreements or Currently Not Collectible status
• Represent you before the IRS when representation is warranted

Offer in Compromise is a last-resort option for taxpayers who meet strict criteria - not the default recommendation.

Disclaimer: This page is general tax information based on IRS and National Taxpayer Advocate materials available as of July 2026. It is not legal advice, tax advice, or a guarantee of any result. AEP is actively rolling out. Eligibility is determined by the IRS from your account history. Rules and systems can change. Consult a qualified tax professional about your specific facts.

Author: William McLee, Enrolled Agent | Last reviewed: July 26, 2026

Primary sources: IR-2026-83; FS-2026-12; NTA Blog (Collins, July 8, 2026); IRS Administrative Penalty Relief; IRS Penalty Relief for Reasonable Cause; IRC sections 6651, 6656 (via law.cornell.edu).