For years, taxpayers who missed a filing or payment deadline for the first time could call the IRS and request First-Time Abate, a manual process that waived certain penalties for people with an otherwise clean compliance history. Starting this summer, the IRS is phasing that process out in favor of an automatic system, and the details matter if you are counting on penalty relief working the way it always has.
Most people never think about penalty relief until they are holding a notice with a dollar amount on it, and by then the rules that apply depend heavily on which tax year is involved and when the return was processed. That timing question is exactly what is changing right now.
What Is the Automatic Exemption From Penalty?
The IRS introduced the Automatic Exemption from Penalty, or AEP, in a July 2026 fact sheet explaining the change. AEP is designed to recognize taxpayers who generally file, pay, and deposit on time but have a one-time compliance slip. Unlike First-Time Abate, it does not require a phone call, a written request, or any application. If you qualify, the IRS applies it automatically while your original return is being processed and sends a notice explaining that a penalty was not assessed because of your compliance history.
Which Penalties Does AEP Cover?
AEP can apply to failure-to-file, failure-to-pay, and failure-to-deposit penalties. It does not extend to daily delinquency penalties, accuracy-related penalties, information return penalties, or any penalty outside those three categories, so it will not cover every notice you might receive.
Who Actually Qualifies?
Eligibility comes down to a compliance track record. According to the IRS, taxpayers generally need three prior years of timely filing, payment, and deposit history, or twelve consecutive quarters for depositors, to qualify. AEP does not eliminate the underlying penalty rules, and taxpayers who do not meet the eligibility requirements can still be assessed a penalty in full, so a single missed year in your recent history can be the difference between automatic relief and a bill you have to fight.
First-Time Abate Is Not Gone Yet
The transition is not immediate. First-Time Abate remains available, on request, for eligible 2024 tax year returns, 2025 quarterly returns, and eligible 2025 tax year and 2026 quarterly returns processed before AEP takes effect. The key difference during this window is that FTA will not be applied automatically the way AEP is; taxpayers or their representatives still need to contact the IRS and ask for it. For original returns due on or after January 1, 2027, FTA goes away entirely and AEP becomes the only version of this relief going forward.
What This Means if You Have a Penalty Right Now
If you received a penalty notice on a return that falls in the transition window, do not assume it will be waived automatically, because for those returns it still has to be requested. Waiting for the IRS to apply relief on its own could mean missing a response deadline instead. If your return does not qualify for AEP at all, whether because of the type of penalty, a spotty compliance history, or a filing date outside the transition rules, reasonable cause relief and IRS appeals remain available, though both require you to make the case rather than relying on the system to do it for you.
At Petry Tax & Advisory, we help individuals and businesses across Houston, the Woodlands, and Denver sort out exactly which form of penalty relief applies to their situation, whether that means confirming AEP already took care of it or building the request for First-Time Abate or reasonable cause relief before a deadline closes. If you have an IRS penalty notice and are not sure how to handle it, schedule a consultation with our team.
This post is for general informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional about your specific situation.
lucy.petry@petrylawfirm.com
