First time abate is changing to a new automatic exemption from penalty

Since 2001, first time abate (FTA) has been the IRS’s most familiar administrative waiver for otherwise compliant taxpayers who incur a failure-to-file, failure-to-pay or failure-to-deposit penalty. Beginning in summer 2026, the IRS is transitioning from FTA to a new administrative penalty waiver: the Automatic Exemption from Penalty (AEP). The change is more than a new name. It moves qualifying relief from a taxpayer-requested abatement after assessment to a systemic decision made during original-return processing.

For practitioners, the practical questions are now:

• How does AEP apply and how is it different from FTA?
• What returns are eligible for automatic consideration?
• Can I still use FTA?
• What are some circumstances that the IRS will miss applying for AEP, and what can I do about it?

The change in one sentence

FTA generally required the taxpayer or practitioner to ask the IRS to remove an assessed penalty; AEP prevents covered penalties from being assessed in the first place when current IRS records show that the taxpayer meets the eligibility rules.

However, like many IRS programs, there are some key nuances the tax pro needs to understand to fully utilize and explain AEP to their clients. As of October 2026, the IRS has not updated its Internal Revenue Manual for the new AEP criteria (IRM Sections 20.1.1.3.3.2 and 20.1.1.3.3.2.1).

Key changes tax professionals should understand

Relief becomes automatic for eligible original returns

Under AEP, the taxpayer doesn’t file Form 843, call the IRS, or write a separate abatement request simply to obtain this administrative relief. The IRS evaluates eligibility when an eligible original return completes processing. If AEP applies, the covered penalty is not assessed, and the IRS sends a notice explaining that relief was granted.

The compliance lookback remains central

Like FTA, eligibility requires a timely compliance history for the same return type during the prior three years, or the prior 12 consecutive quarters for quarterly filers (Form 941s). IRS guidance describes the test as timely filing and payment, with no disqualifying penalty history. A penalty that was later abated for reasonable cause or IRS error does not necessarily break the history. Estimated tax penalties are treated differently and generally don’t count against the test.

Like FTA, if a return is filed late in the prior three years and doesn’t have any associated penalties (i.e., a refund return), it will not be considered late for purposes of AEP.

AEP covers only specific penalties

AEP did not change the types of penalties that can be administratively waived. AEP may prevent assessment of failure-to-file, failure-to-pay, and failure-to-deposit penalties. It doesn’t erase accuracy-related penalties, information-return penalties, daily delinquency penalties or other penalties outside the program. Clients should not interpret an AEP notice as a full abatement of all penalties. Also, AEP, like FTA, doesn’t eliminate the underlying tax and associated interest owed.

Eligible return types are limited

AEP did not add additional forms that qualify for administrative penalty relief. Current IRS guidance identifies Forms 1040, 1065, 1120, 1120-S, 940, 941, 943, 944, 945 and CT-1 as eligible return series. Event-driven and infrequently filed returns, such as Forms 706 and 709, generally are not eligible. Information-reporting penalties also remain outside AEP. Practitioners should confirm both the return series and the specific penalty code before promising relief.

Business taxpayers can qualify

For business taxpayers, the IRS also considers the prior failure-to-deposit penalty and late filing penalties. AEP is unavailable if the IRS waived failure-to-deposit penalties four or more times during the applicable lookback period, or if the penalty involved avoidance of the Electronic Federal Tax Payment System requirement.

Like FTA, AEP also applies to late filing S corporation and partnership penalties. These abatements are often overlooked by business taxpayers. Again, the rule is filing and lack of late filing penalties in the previous three years prior to the penalty year.

AEP suppresses the future failure to pay penalty

This is an important new feature. Unlike FTA, AEP will automatically not allow IRS systems to start to assess future failure to pay penalties on unpaid balances. In the past, most FTA waivers would allow the failure to pay penalty to continue to accrue after the initial abatement request, requiring the tax pro to contact the IRS again for abatement for the accrued failure to pay penalty for the FTA year.

IRS will look to apply AEP even if reasonable cause applies

Because AEP is automated, the IRS will apply the AEP waiver before evaluation for reasonable cause. This will eliminate the ability for the taxpayer to claim the AEP every fourth year (i.e., with three years of compliant behavior). The National Taxpayer Advocate has recommended that the IRS allow reasonable-cause relief to replace AEP when the statutory standard is met.

Taxpayers filing multiple back returns may not get AEP

Filing back returns is where AEP is likely going to break down. IRS systems will automatically check the prior three years for compliance, including filing required returns. When you file multiple back returns at the same time and one of the years qualifies for AEP, the IRS may not provide AEP. Why? Older years, especially if filed by paper, will require the IRS to record these returns for their systems to provide AEP. In these cases, the tax pro will have to call the IRS and ask for AEP after all the returns have been posted to the client’s account.

FTA-to-AEP transition timeline

AEP is going to be “phased in” by the IRS and ultimately replace FTA. Here is the transition and when to use AEP or FTA:

Return or period	Primary relief path	Practice note
2024 tax-year returns, 2025 quarterly returns, and earlier eligible periods	FTA	The taxpayer must request relief; it is not automatic.
Eligible 2025 tax-year returns and 2026 quarterly returns processed during the 2026 transition	AEP if considered during processing; otherwise, FTA may remain available	If a penalty notice is issued, verify processing timing and contact the IRS if the client appears eligible.
Eligible original returns with due dates on or after Jan. 1, 2027	AEP	AEP replaces FTA for covered returns and penalties.

Like any new IRS program, the tax pro should always check their clients’ IRS account for eligibility and confirm that relief was properly granted. IRS account transcripts are especially helpful to evaluate AEP and FTA penalty qualification and provide relief.

Examples practitioners can use

Here are a few very common uses for AEP:

Example 1: Individual late-filed 2025 return

Maria timely filed and paid her 2022, 2023, and 2024 Forms 1040. She files her 2025 Form 1040 late. If IRS records confirm the required history and the return otherwise qualifies, the IRS should prevent the covered failure-to-file and failure-to-pay penalties from being assessed and send an AEP notice. Maria still owes the tax and applicable interest and future failure to pay penalties are suppressed for this year.

Example 2: Transition-year penalty notice

A corporation’s 2025 Form 1120 was processed before the IRS system considered it for AEP, and the IRS assessed a covered penalty. The practitioner should not assume the notice is correct merely because AEP exists. During the transition, the practitioner should review the three-year history and, if eligible, request FTA using the notice telephone number or a written request.

Example 3: Quarterly payroll filer

A business files one 2026 Form 941 late but has 12 consecutive prior quarters of timely filing, payment, and deposit compliance. If no business-specific exclusion applies, AEP may prevent covered penalties from being assessed. The practitioner should still reconcile the notice, tax, deposits and interest because AEP applies only to qualifying penalties.

Example 4: Relief is unavailable under AEP

Jordan files a Form 709 late. Because the return is event-driven and generally outside the AEP program, automatic relief should not be expected. The practitioner should evaluate reasonable cause and any other available administrative or statutory remedy instead.

Practice traps and planning points

• Don’t promise automatic relief before checking the return series. AEP is not universal.
• Separate penalty relief from tax and interest. AEP doesn’t excuse the balance due, and interest generally continues on unpaid tax.
• Review IRS account history, not only client recollection. Prior assessments, abatements, posting dates, and return processing order can affect the analysis. IRS account transcripts are the best source to evaluate AEP and FTA penalty relief.
• Treat 2025 annual and 2026 quarterly returns as transition cases. A penalty notice may call for an FTA request even though the same return type will be handled automatically going forward.
• Preserve reasonable-cause arguments. AEP is an administrative shortcut, not the exclusive form of penalty relief.
• Read the AEP notice carefully. Confirm the tax period, penalty type, and amount affected; don’t assume every penalty on the account was waived.
• Use FTA if available. Prior years may still qualify for FTA. Review IRS account transcripts and contact the IRS for available FTA relief. The IRS will not look retroactively to apply FTA in its AEP program.

Bottom line

AEP should reduce routine abatement calls and letters for taxpayers with clean compliance histories, but it also creates a new verification task. Tax professionals must confirm that the return and penalty are covered, the lookback period is satisfied, and the IRS processed the return under the correct regime. During the transition, the best practice is simple: never assume that an assessed penalty, or the absence of one – tells the whole story.