IRS ‘Automatic Exemption from Penalty’ starts Summer 2026: late-filing impact
Starting Summer 2026, the IRS is shifting from a “request it” model for certain late-filing and late-payment penalty relief to a system where the relief can be applied automatically for eligible taxpayers—without needing to contact or respond to the IRS.
The change is the IRS’s administrative penalty relief called Automatic Exemption from Penalty (AEP), which the IRS says is replacing its prior First Time Abate (FTA) approach for the situations AEP covers.
What is AEP, and what actually changes?
The IRS says that if you file an eligible, original return late and/or pay the tax late, but you have a history of timely compliance, the IRS won’t assess certain penalties—including penalties for failure to file, failure to pay, or failure to make a deposit.
Practically, that can reduce “penalty-only” add-ons that can otherwise show up after processing, because—under AEP—the IRS says no penalty assessment is made for eligible cases.
When it starts: Summer 2026, with 2025 and 2026 filings
The IRS says AEP begins in Summer 2026 and relief starts with:
- 2025 tax year returns, and subsequent
- 2026 quarterly returns, and subsequent
The IRS also says you’ll know AEP was applied because you’ll receive a letter after your original return completes processing.
Who qualifies: the “timely compliance history” rule
Eligibility hinges on more than just being late this year. The IRS’s core rule is that, for the same return type, you generally must have:
- Timely filed for the prior three years (or 12 consecutive quarters for quarterly filers), and
- Either no penalty (except the estimated tax penalty) was assessed, or a penalty was assessed but later abated for reasonable cause or IRS error, and
- For business taxpayers, additional limits (including how often the IRS waived certain deposit penalties and whether the penalty was tied to EFTPS avoidance).
Which returns and penalties are covered
Eligible return series for AEP consideration include:
- Forms 1040, 1065, 1120
- Forms 940, 941, 943, 944, 945
- Form CT-1
Eligible penalty categories the IRS says are covered include:
- Failure to File (IRC 6651(a)(1) for tax returns; IRC 6698(a)(1) for partnership returns; IRC 6699(a)(1) for S corporation returns)
- Failure to Pay (IRC 6651(a)(2) and 6651(a)(3))
- Failure to Deposit (IRC 6656)
How you find out: an IRS letter, and no action required
The IRS says you’ll typically receive a letter explaining that, even if you filed late, paid late, or didn’t make a deposit timely, the applicable penalties weren’t assessed because of your timely compliance history.
The IRS also says you don’t need to contact or respond for AEP-covered penalties. If you see an assessed penalty and believe you should have qualified, the IRS says to contact the IRS.
What AEP does not do (important for “what I still owe”)
AEP is about penalty assessment/relief, not wiping out the underlying tax or every cost tied to a late return.
The IRS says you are still liable for any unpaid tax, interest, or other penalty assessments that aren’t subject to AEP relief.
The IRS also lists major situations where relief isn’t available, including:
- Returns filed once or infrequently (event-based filing requirements)
- The Daily Delinquency Penalty (DDP)
- Information reporting dependent on another filing
Interest still matters—and it’s handled differently than penalties
The IRS says it assesses interest on penalties, which increases what you owe until your balance is paid in full. But the IRS also says it will automatically reduce or remove the interest related to a penalty if your penalties are reduced or removed.
If you don’t qualify for AEP
If AEP doesn’t apply, the IRS says you may request penalty relief based on reasonable cause. In other words: AEP is designed to reduce the need for the “request it” pathway for eligible cases, but it doesn’t close every door for people who don’t meet the AEP rules.
Budget takeaway: if you usually file and pay on time but had a one-off late filing, payment, or deposit, AEP could reduce the penalty portion of your bill—but you won’t be able to confirm it until you see the IRS communication.
Sources
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