How does the IRS Automatic Exemption from Penalty work?

IRS Automatic Exemption from Penalty prevents certain failure-to-file, failure-to-pay and failure-to-deposit penalties from being assessed when an eligible taxpayer has a strong recent compliance history.

Automatic Exemption from Penalty (AEP) begins with eligible 2025 annual returns and 2026 quarterly returns. It replaces First Time Abate (FTA) for eligible original returns due Jan. 1, 2027, or later. AEP does not erase the penalty rules or excuse late compliance. It changes how qualifying relief is delivered: the IRS applies it during original-return processing instead of waiting for the taxpayer to ask.

What is IRS Automatic Exemption from Penalty?

AEP is automatic administrative relief for eligible original returns. Taxpayers do not need to apply or submit a separate request.

When AEP applies, the IRS does not assess a covered penalty and sends the taxpayer a notice explaining that relief was granted based on prior timely compliance. The taxpayer still owes the underlying tax and interest, along with any penalties outside the program.

Who qualifies for AEP?

A taxpayer generally needs timely compliance for the prior three years, or the prior 12 consecutive quarters for a quarterly filer.

IRS records must show that the same return type was timely filed and the tax due was paid during the lookback period. A qualifying penalty generally cannot have been assessed, other than an estimated tax penalty, unless it was later removed for reasonable cause or IRS error.

A business taxpayer also will not qualify if the IRS waived the failure-to-deposit penalty four or more times during the lookback period or assessed the penalty for Electronic Federal Tax Payment System (EFTPS) avoidance.

Which returns and penalties qualify for AEP?

AEP applies to specified income and employment tax returns and covers eligible failure-to-file, failure-to-pay and failure-to-deposit penalties, regardless of amount.

Eligible returns include Form 1040, U.S. Individual Income Tax Return; Form 1065, U.S. Return of Partnership Income; Form 1120, U.S. Corporation Income Tax Return; and employment tax Forms 940, 941, 943, 944 and 945. Form CT-1, Employer’s Annual Railroad Retirement Tax Return, may also qualify.

Information returns and returns filed only for a transaction or infrequent event generally do not qualify. IRS examples include Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. AEP also excludes Daily Delinquency and accuracy-related penalties. Information return penalties are not covered either.

Does AEP replace First Time Abate?

Yes, but not for every return immediately. FTA remains available during the transition and for earlier eligible periods.

FTA may still apply to eligible 2024 annual returns, 2025 quarterly returns and earlier periods. It may also apply to eligible 2025 annual returns and 2026 quarterly original returns processed before AEP began that did not receive AEP consideration. Unlike AEP, FTA must be requested.

For eligible original returns due Jan. 1, 2027, or later, AEP replaces FTA.

Which penalty relief path applies?

Start with the return period and determine when the return was processed. The taxpayer’s compliance history then helps identify the appropriate relief path.

Reasonable cause remains a case-by-case determination, and taxpayers may appeal an adverse penalty-relief decision.

What should tax professionals do when a penalty notice arrives?

First, check whether AEP should have applied before moving to another relief option.

1. Identify the return, tax period and penalty.
2. Confirm whether the return and penalty qualify for AEP, then review the taxpayer’s prior compliance.
3. Determine whether the IRS considered AEP and whether FTA remains available.
4. If administrative relief does not apply, evaluate reasonable cause or appeal rights.

If the taxpayer appears eligible for AEP but received a covered penalty, review the IRS administrative penalty relief guidance, then contact the IRS and ask whether AEP was considered. That step may prevent the practitioner from preparing a relief request the taxpayer does not need.

Tax rules and IRS procedures keep changing, but you do not have to sort through them alone. NATP is here throughout your career with timely guidance and practical tools that help you understand changes like AEP and apply them confidently for your clients.