Quick Answer: The IRS’s new AEP program expands First Time Abatement by automatically removing certain penalties for eligible taxpayers who meet the three-year compliance-history rules. For eligible 2025 tax-year returns and 2026 quarterly filings, that can include qualifying failure-to-file, failure-to-pay, payroll deposit, and pass-through return penalties tied to Forms 1065 and 1120-S.
Key Takeaways
- AEP can automatically remove penalties if you have a clean three-year compliance history and meet the program’s other requirements.
- First Time Abatement can apply to qualifying individual, payroll, partnership, and S corporation penalties, but not estimated-tax, accuracy-related, or fraud penalties.
- AEP is being phased in for 2025 returns and 2026 quarterly filings, with full replacement of First Time Abatement for eligible original returns due on or after January 1, 2027.
Getting a notice about an IRS penalty being charged to your IRS account has a way of getting your attention.
That’s why so many of my clients, when they see one of those official envelopes in their mailbox sandwiched between the junk mail and bills, end up at my door looking for help.
And until now, if you ran into certain IRS penalties after several years of clean compliance, you had to wait for the penalty to be assessed and then ask the IRS to remove it under First Time Abatement rules.
That’s changing.
Under the IRS’s new Automatic Exemption from Penalty, or AEP, the IRS can review your recent compliance history while processing an eligible return. If you qualify for first-time relief, certain penalties won’t be assessed in the first place.
So while the basic relief isn’t new, the timing is. But AEP has limits, and whether it applies depends on the return, the penalty, and your prior filing and payment history.
What is changing with First Time Abatement?
First Time Abatement traditionally required you to wait until the IRS assessed a penalty and then ask for relief. That usually meant contacting the IRS by phone or letter after the penalty had already appeared on your account.
AEP changes the timing. For eligible returns, the IRS can review your compliance history while processing the return and determine whether you qualify before the covered penalty is assessed.
So instead of waiting for the penalty and then requesting relief, the IRS can apply that relief automatically to your IRS account. You don’t have to submit a separate AEP request.
Who qualifies for automatic penalty relief?
AEP primarily looks at your prior three years of tax compliance. This means that to qualify for this automatic First Time Abatement, you need a clean three-year compliance history, including filing and paying on time. If you’re a 1040 taxpayer, the program covers qualifying failure-to-file and failure-to-pay penalties.
For example, say you filed and paid correctly for the required prior period, then filed a personal or business return late (Form 1040, 1065, or 1120-S) or missed a required payroll tax deposit (Form 941). If you meet the other First Time Abatement requirements, the IRS may remove the qualifying penalty automatically under AEP.
Prior estimated-tax penalties don’t count against you for this eligibility test. But AEP doesn’t remove estimated-tax penalties themselves.
Which penalties does automatic penalty relief apply to?
AEP does not wipe out every IRS penalty. It can apply to qualifying failure-to-file, failure-to-pay, and payroll failure-to-deposit penalties across individual and business returns. Other penalties still follow their own rules.
That means AEP does not remove estimated-tax penalties themselves, even though a prior estimated-tax penalty does not count against you for the three-year eligibility test.
Accuracy-related penalties, fraud penalties, and penalties tied to specialized filings such as estate or gift tax returns also fall outside AEP.
When does AEP go into effect?
AEP is being phased in rather than switched on for every return at the same time. That means if you filed a 2025 return and it was processed earlier in the 2026 filing season, it may have gone through before AEP was available. If you filed a return closer to the April 15 deadline (or were on extension), your return may have been processed after the automatic relief system is in place.
Then, for eligible original returns due on or after January 1, 2027, AEP fully replaces First Time Abatement. The IRS will check for relief during processing instead of making you wait for the penalty and request abatement afterward.
If you receive a penalty notice in your mailbox, look closely at the tax year, the type of penalty, your prior compliance history, and when the return was processed to determine whether AEP should have applied or whether the older FTA process still governs the penalty.
Professional tip: A penalty notice during the transition doesn’t necessarily mean you were ineligible for relief. Review the IRS account transcript to see how the penalty was processed and, when appropriate, request traditional First Time Abatement if AEP wasn’t applied.
What if I don’t qualify for AEP?
If you don’t qualify for AEP, your main option for relief is through reasonable cause, which looks at why you filed or paid late rather than at your prior compliance history.
Reasonable cause can apply when circumstances prevented you from filing or paying on time despite reasonable efforts to comply. If you or a family member experienced a serious, life-changing illness that demanded your time and attention or your house was destroyed in an unexpected natural disaster, you could still qualify for abatement.
But you won’t automatically see the penalty removed. The IRS will look closely at what happened, how it affected your ability to comply, and what you did once the difficulty/problem was solved.
So if AEP isn’t available, let’s look at whether what happened in your situation supports a reasonable-cause request and whether the IRS assessed the penalty correctly in the first place. Depending on your situation, that might mean challenging an assessment that doesn’t line up with your filing history, payment history, or the circumstances that caused the delay.
Final thoughts
Automatic penalty relief is a real improvement in how First Time Abatement works. But “automatic” doesn’t mean every penalty disappears or that every notice is correct.
So if you receive an IRS penalty notice, don’t assume the amount is final. Call for a consultation. I can look at whether AEP should have applied, whether another form of relief fits the facts, and what you actually still owe.
FAQs
“Does AEP erase the tax and interest too?”
No, AEP removes a qualifying penalty, not the underlying tax you owe. Interest on unpaid tax can still remain due, although interest tied specifically to an abated penalty is generally adjusted when that penalty is removed.
“Can AEP apply if I already paid the penalty?”
AEP is designed to prevent a qualifying penalty from being assessed during processing, so it isn’t the mechanism used once a penalty has already been assessed and paid. You may still be able to request traditional First Time Abatement and seek a refund or credit if you qualify and the claim is timely.
“Does an IRS payment plan affect my eligibility for AEP?”
Being on a payment plan does not, by itself, disqualify you from First Time Abatement. The IRS’s traditional FTA rules treat taxpayers as meeting the payment requirement when they’ve paid the tax due or arranged to pay it, even through an installment agreement.
“Do I need to file anything with the IRS to receive AEP?”
No separate AEP application is required. For an eligible return, the IRS reviews your compliance history during processing and applies the relief automatically.
“Does AEP apply to amended tax returns?”
AEP is intended for eligible original returns, not amended returns. If an amended return raises a penalty issue, there are other penalty-relief options (traditional First Time Abatement, reasonable-cause relief, or challenging an incorrectly assessed penalty), but the amended return itself does not trigger automatic AEP review.