The Automatic Exemption from Penalty, or AEP, was announced July 8, 2026, and began phasing in during summer 2026. For eligible original returns, it is intended to replace First Time Abate for returns with original due dates on or after January 1, 2027.

How the new process works

AEP can prevent certain penalties from being assessed while an eligible original return is processed. Generally, the taxpayer must have timely filed the same type of return and paid any tax due during the prior three years. For quarterly filers, the standard is generally 12 consecutive quarters.

The IRS lists Forms 1040, 1065, 1120, 1120-S, 940, 941, 943, 944, 945 and CT-1 among the return series eligible for AEP consideration, subject to program limits. An eligible return generally must be filed within three years of its original due date.

AEP may prevent failure-to-file and failure-to-pay penalties. For applicable business returns, it may also prevent failure-to-deposit penalties. Business taxpayers face additional requirements, including limits related to prior failure-to-deposit relief and electronic-payment-system avoidance.

When AEP applies, the IRS sends a separate notice explaining that the penalty was not assessed because of the taxpayer’s compliance history. A taxpayer who receives that confirmation generally does not need to contact the IRS or respond to it.

Why some taxpayers may still get penalty notices

The transition from First Time Abate is not immediate for every return. AEP consideration begins with eligible 2025 tax-year returns and 2026 quarterly returns, but the IRS says some of those returns may have been processed before AEP became available. Those taxpayers may still receive a notice assessing a penalty.

First Time Abate may still be available for eligible returns during the transition, including qualifying 2025 tax-year returns processed before AEP started and qualifying 2026 quarterly returns processed before the phase-in. Unlike AEP, First Time Abate is not automatic: the taxpayer must contact the IRS and request it. Reasonable-cause relief may also be available when the facts support it.

The Taxpayer Advocate Service says taxpayers should not ignore a notice assessing a failure-to-file, failure-to-pay or failure-to-deposit penalty when no separate AEP confirmation notice was received. Review the tax period, penalty type and filing and payment history before deciding what to do.

What AEP does not cover

AEP is not a broad tax amnesty and does not eliminate the duty to file, pay or make deposits on time. It generally does not cover daily delinquency penalties, accuracy-related penalties, information-return penalties or returns filed only for infrequent events, such as Forms 706 and 709.

Taxpayers remain responsible for the underlying tax, interest and any penalties that are not eligible for AEP. Interest on unpaid tax remains due. If an eligible penalty is removed, the IRS says it will automatically reduce or remove interest tied specifically to that penalty.

Form CT-1, the Employer’s Annual Railroad Retirement Tax Return, is listed as eligible for AEP consideration, but the IRS procedural guidance says it is not programmed for systemic application when the original return posts. Affected taxpayers may need to contact the IRS for manual consideration.

What taxpayers should do now

• Keep the IRS notice and check whether it says AEP was applied.
• If the IRS assessed a covered penalty and there is no separate AEP confirmation, review the tax period, penalty type and compliance history.
• Call the toll-free number on the notice and ask about AEP eligibility, First Time Abate or reasonable-cause relief.
• Have the notice, return, payment records and filing history available when contacting the IRS.
• Continue paying the underlying tax and interest, even if a penalty is removed.
• Business taxpayers should check the additional rules for failure-to-deposit penalties.

The key distinction is simple: an AEP confirmation notice generally requires no response, but a notice that assesses a penalty still requires review. The IRS says AEP will become the standard automatic process for eligible original returns with due dates beginning January 1, 2027.

Sources

• IRS administrative penalty relief guidance
• Taxpayer Advocate Service transition guidance

The agreement came roughly two months before the funding deadline. It was reported as a deal between Senate leaders, not as a completed appropriations law. The next major step is Senate action, with a vote expected before the recess.

At the same time, the Internal Revenue Service is changing how some taxpayers receive relief from federal tax penalties. The agency announced July 8 that it would introduce an Automatic Exemption from Penalty during summer 2026 and phase out its First Time Abate program.

A funding deal still facing Senate action

The Senate agreement was aimed at reducing the risk of a shutdown when the current fiscal year ends on Sept. 30, 2026. A shutdown could affect federal operations and services, making the timing of the agreement significant even though the reported deal still required congressional action.

Democrats sought to extend an expiring health-insurance tax credit, putting the future of that benefit among the issues tied to the funding negotiations. Republicans and the White House emphasized spending accountability and preventing misuse of federal grants.

The reported agreement did not by itself establish that the government’s funding bills had been enacted. Senate approval remained the known next step, and the final statutory language was not identified in the report describing the deal.

What the IRS automatic relief would do

The IRS’s new process is designed to provide penalty relief without requiring an eligible taxpayer to submit a separate request. The automatic exemption would apply to failure-to-file, failure-to-pay and failure-to-deposit penalties.

Eligibility depends on a taxpayer’s filing and payment history. For annual returns, the IRS says a taxpayer must have three prior years of timely filing and payment. For quarterly returns, the requirement is 12 consecutive timely quarters.

The system applies to eligible original returns beginning with tax year 2025 and to 2026 quarterly returns. The IRS said the new approach would begin during summer 2026 while the First Time Abate program is phased out.

That distinction matters for taxpayers who have generally complied with their federal tax obligations but later face a qualifying penalty. The relief is not universal: eligibility depends on meeting the IRS requirements, including the specified record of timely filing and payment.

The budget backdrop

The funding negotiations are taking place against a federal budget outlook in which deficits and spending remain historically high. The Congressional Budget Office’s latest baseline projected a $1.9 trillion federal deficit for fiscal year 2026.

CBO projected $7.4 trillion in federal outlays and $5.6 trillion in revenues for the year. Those figures illustrate the scale of the budget decisions behind the short-term funding agreement and the continuing debate over spending controls.

CBO also projected that federal debt and deficits would remain historically high. That long-term outlook adds pressure to negotiations over spending accountability, even as lawmakers face the immediate need to keep the government funded beyond Sept. 30.

What happens next

The immediate congressional milestone is a Senate vote before the August recess. The funding agreement must move through that process before it can be treated as enacted law, and the Sept. 30 deadline remains the key date for avoiding a lapse in federal funding.

For taxpayers, the IRS’s next step is implementation of the automatic-relief system during summer 2026. Eligible annual and quarterly filers will not need to request the exemption under the agency’s announced process, but the relief will depend on satisfying the agency’s filing and payment-history rules.

Eligible taxpayers will not need to submit a separate request for relief under the new process. The IRS says the program will generally be available to people and businesses that filed and paid on time during the prior three years. For taxpayers who file quarterly, eligibility generally requires 12 consecutive quarters of timely filing and payment.

The change applies to specified failure-to-file, failure-to-pay and failure-to-deposit penalties. Those penalties can be assessed when a return is filed late, a tax payment is late or required deposits are not made on time.

How the automatic process will work

The Automatic Exemption from Penalty, or AEP, is intended to replace a request-based approach for taxpayers who meet the IRS’s compliance criteria. Rather than requiring an eligible taxpayer to ask for relief, the agency will apply the process automatically as it phases in.

The IRS currently offers First Time Abate, a penalty-relief option that taxpayers may request when they meet applicable requirements. First Time Abate will be phased out as AEP is implemented. The agency’s announcement does not say that First Time Abate ended immediately on July 8.

That transition distinction matters for taxpayers dealing with a penalty before the new system is fully operational. The IRS has described implementation as beginning during summer 2026, but it has not provided a single nationwide launch date.

Not every return or penalty will qualify

The new process is not a blanket exemption for all taxpayers. Eligibility depends on the taxpayer’s filing and payment history and on whether the penalty falls within the types covered by the program.

Information returns are generally excluded. Returns tied to specific or infrequent transactions are also generally excluded, according to the IRS. The announcement therefore does not establish automatic relief for every type of filing or every penalty a taxpayer might face.

Taxpayers should also distinguish penalty relief from forgiveness of the underlying tax. The AEP process concerns specified penalties; it does not mean that the tax debt itself is erased.

What taxpayers should expect next

The IRS says the process will begin phasing in during summer 2026, with First Time Abate being phased out during the transition. The agency has not released a single nationwide count of how many taxpayers are expected to qualify.

For eligible taxpayers, the practical change is that relief for covered penalties should not require a separate request once the automatic process applies. The program could alter how millions of tax-administration cases are handled, but the IRS’s announcement does not provide a precise estimate of the number of qualifying taxpayers.

Until the phase-in is complete, the timing and application of relief may depend on the implementation status of the new process and the taxpayer’s specific filing history, payment record and type of return. The next known step is the IRS’s summer 2026 implementation of AEP.

On July 8, 2026, the agency announced its Automatic Exemption from Penalty program, or AEP. For eligible taxpayers, the IRS will prevent certain penalties during original return processing without requiring a separate request. First Time Abate, the existing request-based program, remains available for some earlier and transition-period returns.

What is changing

AEP is an IRS administrative program, not a new statutory tax exemption or a blanket waiver of penalties. It is designed for taxpayers who generally complied with their filing, payment and deposit obligations but have a one-time problem.

When a taxpayer qualifies, the IRS applies AEP automatically during original return processing. No application or separate request is required, and the agency says it will send a notice confirming that the penalty was not assessed because of the taxpayer’s timely compliance history.

Eligibility generally requires the same type of return to have been filed on time during the three prior years, with tax due paid on time. For quarterly returns, the relevant history is generally 12 consecutive quarters. Other conditions can apply, especially for business taxpayers.

The key date is Jan. 1, 2027

For eligible original returns with due dates on or after Jan. 1, 2027, AEP is expected to replace First Time Abate. The cutoff is based on the return’s original due date, not simply the date the IRS finishes processing it.

The IRS began phasing in AEP during summer 2026. The agency’s guidance says AEP consideration begins with eligible 2025 tax-year returns and 2026 quarterly returns, but some of those returns may still have been processed before the automated system was available.

Which returns may still require a request

First Time Abate remains available by request for eligible 2024 tax-year returns and eligible 2025 quarterly returns. It may also remain available for eligible 2025 tax-year returns and eligible 2026 quarterly returns that were processed before AEP began.

For those returns, First Time Abate will not be applied automatically. If a qualifying return receives a penalty notice and the taxpayer does not receive a separate notice saying AEP was applied, the taxpayer should contact the IRS and ask whether First Time Abate or another form of relief is available.

What AEP can cover

For eligible individuals, AEP can prevent failure-to-file and failure-to-pay penalties. For eligible business taxpayers, it can also cover failure-to-deposit penalties.

The IRS says AEP generally applies to certain recurring return series, including Forms 1040, 1065, 1120, 940, 941, 943, 944, 945 and CT-1. Event-based or infrequently filed returns, such as estate and gift tax returns, generally are not eligible.

AEP does not cover every penalty. IRS guidance excludes daily delinquency penalties, accuracy-related penalties, information-reporting penalties and other penalties outside the program. Business taxpayers also face additional conditions for failure-to-deposit relief, including limits related to prior penalty waivers and electronic-payment-system avoidance.

AEP does not erase the underlying tax or interest. Taxpayers remain responsible for filing, paying and making required deposits on time, as well as paying penalties that fall outside the program.

Why the change matters

The National Taxpayer Advocate says the old process left some eligible taxpayers without relief because they did not know to ask, could not reach the IRS or could not afford professional help. The advocate says that burden was especially significant for low-income taxpayers and people without access to a tax professional.

In fiscal year 2025, nearly 220,000 taxpayers received First Time Abate relief through the manual process. The Taxpayer Advocate Service estimates that more than 1.5 million taxpayers would have received relief if AEP had been in place during that same period. That is an estimate based on fiscal year 2025 data, not a guarantee of future recipients.

The National Taxpayer Advocate has also urged the IRS to preserve reasonable-cause relief when a taxpayer’s circumstances support it, rather than using an administrative waiver in a way that could affect eligibility for future AEP relief. That issue remains part of the implementation debate.

What taxpayers should do now

• Keep filing, paying and making required deposits by the deadline. AEP is limited relief, not permission to file or pay late.
• Check the return’s tax year, return type, original due date and processing timing before assuming relief will be automatic.
• If an eligible transition-period return receives a penalty notice, call the IRS using the number on the notice and ask whether First Time Abate applies.
• Keep the notice and records showing your filing and payment history available.
• If neither AEP nor First Time Abate applies, reasonable-cause relief may still be available depending on the facts.

The practical rule is simple: eligible original returns with due dates on or after Jan. 1, 2027, are expected to move to automatic relief. Earlier and transition-period returns may still require taxpayers to contact the IRS.

Sources

• IRS: Automatic Exemption from Penalty — What taxpayers should know
• National Taxpayer Advocate: The IRS implements automatic penalty relief

The IRS announced the change on July 8, 2026, and said implementation began during summer 2026. AEP is replacing First Time Abate, the administrative relief process that previously required taxpayers to ask the IRS to remove certain penalties.

Who may qualify

In general, taxpayers must have timely filed the same type of return and paid the tax due during the prior three years. For quarterly filers, the lookback is 12 consecutive quarters. The IRS also considers whether penalties during that period were absent or were later removed because of reasonable cause or IRS error.

The program is not automatic forgiveness for every late filer. Business taxpayers face additional requirements, including limits on prior failure-to-deposit penalty waivers and restrictions involving the Electronic Federal Tax Payment System.

Which penalties and returns are covered

AEP can prevent certain failure-to-file, failure-to-pay and failure-to-deposit penalties from being assessed. IRS guidance lists Forms 1040, 1065, 1120, 940, 941, 943, 944, 945 and CT-1 among the return series eligible for consideration.

The program generally begins with 2025 tax-year returns and 2026 quarterly returns, along with later eligible periods. Event-based or infrequently filed returns, information reporting tied to another filing and the Daily Delinquency Penalty are among the exclusions listed by the IRS.

What taxpayers should do during the transition

For taxpayers who qualify, the IRS applies AEP when an eligible original return completes processing. The agency will send a notice explaining that relief was granted, and taxpayers generally will not need to respond.

The transition may be less straightforward for some 2025 and 2026 filings. The IRS says qualifying taxpayers may still receive a penalty notice while First Time Abate is being phased out. Anyone who receives a notice showing an assessed penalty but believes AEP should have applied should review the notice and contact the IRS using its instructions rather than ignoring it.

What the program does not erase

AEP is an administrative penalty-relief program, not a cancellation of the underlying tax bill. Taxpayers remain responsible for unpaid tax, interest and penalties that are outside the program. People who do not qualify may still request relief based on reasonable cause.

The IRS says AEP will replace First Time Abate for eligible returns with original due dates on or after January 1, 2027. Until then, taxpayers and businesses should keep records of filing and payment history and check each IRS notice carefully.

Sources

• IRS administrative penalty relief guidance
• National Taxpayer Advocate analysis

What the IRS is changing

In an announcement dated July 8, 2026, the IRS said AEP is a new systemic process that replaces the long-standing First Time Abate administrative relief. Under AEP, eligible taxpayers generally do not need to request penalty relief—they’re instead expected to get a notice once relief is applied during processing.

When AEP starts

The IRS says AEP is expected to begin in summer 2026. It applies to eligible original returns beginning with:

• Tax year 2025 original returns
• 2026 quarterly returns and future tax periods

Who qualifies for AEP

Eligibility is tied to whether you have a history of timely filing and paying:

• You timely filed the same return type for the prior three years (or 12 consecutive quarters for quarterly returns), and
• You either had no penalty assessed (except the estimated tax penalty) or had a penalty assessed that was later abated for reasonable cause or IRS error.

For business taxpayers, the IRS adds additional conditions. For example, the IRS says it did not waive the failure to deposit penalty four or more times in the prior three years (or 12 consecutive quarters), and that the failure-to-deposit penalty was not charged for EFTPS avoidance.

What types of penalties AEP covers—and what it doesn’t

The IRS says AEP is designed to stop certain administrative penalties from being assessed during processing when AEP applies. The eligible penalty categories are:

• Failure to file
• Failure to pay
• Failure to deposit

But AEP is not universal. The IRS says you can’t get this relief for certain situations, including:

• Returns filed once or infrequently (event-based filing)
• the Daily Delinquency Penalty (DDP)
• Information reporting dependent on another filing

The IRS also gave examples in its newsroom release, saying some information returns and returns filed only in response to specific transactions or infrequent events—such as Form 706 and Form 709—generally are not eligible.

How the “automatic” process works for taxpayers

The IRS says AEP is applied when your original return completes processing. If your original return is eligible:

• the IRS won’t assess penalties for failure to file, failure to pay, or failure to make a deposit; and
• you should receive a notice explaining that AEP relief was granted.

The IRS says eligible taxpayers generally don’t need to contact the IRS or respond to the notice to get the relief.

If you receive a penalty notice during the transition

This is the scenario to watch next. The Taxpayer Advocate Service says taxpayers should not ignore an IRS notice assessing a failure-to-file, failure-to-pay, or failure-to-deposit penalty. If you received a penalty notice for a 2025 tax year return and you did not get a separate notice saying AEP was applied, it recommends:

• reviewing the notice carefully, and
• calling the IRS using the toll-free number on the notice to request penalty relief if you believe you qualify.

If you don’t qualify for AEP, the IRS says you may still be able to request penalty relief based on reasonable cause, and the IRS will notify you of its decision.

What to do now

• Keep your IRS letters. Don’t assume “automatic” means “no action ever.” Compare what the notice says about the penalty and whether it mentions AEP.
• If AEP isn’t mentioned and you think you qualify, check before paying. Follow the notice instructions and consider contacting the IRS using the number on the letter.
• Check whether your situation is excluded. AEP does not apply to all returns or penalty situations, including DDP and some event-based/information-reporting scenarios.

For eligible taxpayers, the IRS says AEP is meant to reduce burden by suppressing certain penalties during processing instead of forcing people to go through a request workflow. But during the rollout, your notice is still the practical place to confirm what happened for your specific return.

Sources

• IRS Newsroom (IR-2026-83) — “IRS Simplifies Penalty Relief: Introduces Automatic Process for Eligible Taxpayers” (July 8, 2026)
• Taxpayer Advocate Service (NTA Blog) — “A long-awaited taxpayer win: The IRS implements automatic penalty relief” (July 2026)

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

• IRS: Administrative penalty relief (AEP & FTA timeline, eligibility, exclusions)