The IRS's new Automatic Exemption from Penalty (AEP) program may automatically spare eligible taxpayers from certain late-filing and late-payment penalties. TaxAudit tax professionals caution that taxpayers who also qualify for reasonable-cause relief should verify which relief the IRS applied, because it may affect their options in a later year.
FOLSOM, Calif., Nov. 10, 2026 /PRNewswire-PRWeb/ -- Taxpayers with three prior years of timely compliance may qualify for automatic relief from certain penalties. But automatic relief is not always the best relief option, and the reason a penalty is removed can matter later.
Individuals may face a failure-to-file penalty for filing Form 1040 late or failing to pay the tax due by the deadline unless they show reasonable cause and no willful neglect. The IRS evaluates reasonable cause on a case-by-case basis, considering whether the taxpayer exercised ordinary business care and prudence but still could not file or pay on time.
IRS First Time Abate Program
Before AEP, the IRS's First-Time Abate (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 Introduces the Automatic Exemption from Penalty Program
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.
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.
Transition Period from the FTA Program to the AEP Program
FTA and AEP overlap during the transition period. 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 Catch Taxpayers Should Understand
Automatic relief will benefit many taxpayers, but those who may also qualify for reasonable cause should determine why a penalty was removed. Reasonable cause abatements are not subject to the three-year compliance rule. By contrast, when the IRS uses FTA or AEP, the taxpayer generally cannot receive that relief again until the compliance requirement is met again.
Example: Why the Basis for Relief Matters
A fire destroyed Tony's home and records in December 2024. He filed his 2024 Form 1040 late, owed $2,500, and requested reasonable-cause relief. However, because his previous three years were compliant, the IRS granted an FTA instead.
Tony then missed the 2025 return filing deadline 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. If the 2024 penalties had been removed for reasonable cause, FTA might have remained available for Tony's 2025 return.
Because AEP is applied automatically when an original return is processed, taxpayers may receive it before they can request relief due to reasonable cause. 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. AEP makes relief easier to receive, but taxpayers should confirm that today's relief does not unnecessarily limit tomorrow's options.
Media Contact
Danielle Miranda, TaxAudit, 1 916.904.8062, [email protected], www.taxaudit.com
SOURCE TaxAudit
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