The IRS is changing a common penalty-relief process in summer 2026, and the practical advice for taxpayers is simple: do not ignore a notice, but do not assume every listed penalty must be paid immediately either.
In a July 8, 2026 announcement, the agency said it is introducing Automatic Exemption from Penalty, or AEP, for taxpayers with a history of filing and paying on time. The new process is meant to replace First Time Abate, the longtime administrative relief program that usually required taxpayers to contact the IRS and ask for help.
The shift matters because penalty notices often arrive at the worst possible moment, after a missed deadline, a cash-flow problem, a payroll deposit issue or a confusing filing season. AEP does not forgive the underlying tax. It does not erase interest on tax owed. But for eligible taxpayers, it can stop certain penalties from being assessed in the first place.
The short answer
AEP may apply automatically when an eligible original return is processed and IRS records show a timely compliance history for the prior three years, or 12 consecutive quarters for quarterly filers. The IRS says it can apply to failure-to-file, failure-to-pay and failure-to-deposit penalties.
If the relief applies, the taxpayer does not need to submit a form or separate request. The IRS says it will send a notice explaining that the penalty was not assessed because of the taxpayer's compliance history.
The catch is that summer 2026 is a transition period. Some taxpayers with eligible 2025 tax year returns or 2026 quarterly returns may still receive penalty notices before AEP is fully in place. The IRS says those taxpayers may still need to contact the agency to request First Time Abate during the transition.
Who should check first
Start with the return type. The IRS administrative penalty relief page says AEP begins with 2025 tax year returns and 2026 quarterly returns, and lists Forms 1040, 1065 and 1120; Forms 940, 941, 943, 944 and 945; and Form CT-1 among eligible return series.
Then check your compliance history. The core rule is not merely that this was your first mistake. The IRS says taxpayers generally need three prior years of timely filing and payment for the same return type, or 12 consecutive quarters for quarterly returns. For some business taxpayers, additional limits apply, including rules tied to repeated deposit-penalty waivers and Electronic Federal Tax Payment System avoidance.
Next, check the penalty type. AEP is aimed at failure to file, failure to pay and failure to deposit. The IRS fact sheet says it generally does not apply to daily delinquency penalties, accuracy-related penalties, information return penalties or other penalties outside the covered categories.
Finally, separate penalty relief from tax debt. If AEP applies, it can prevent the covered penalty from being assessed. The IRS says taxpayers remain responsible for unpaid tax, interest and any penalties that are not covered by the program.
What to do when a notice arrives
First, read the notice for the tax period, return type, penalty name and response deadline. AEP should come with a letter explaining that relief was applied. If the notice shows that a penalty was assessed and you believe you meet the AEP or First Time Abate rules, use the contact information on the notice rather than guessing from a search result.
Second, compare the notice to your own records. Look for proof that prior returns were filed on time, tax was paid when due, and deposits were made properly. For business returns, payroll deposit records and EFTPS confirmations can matter.
Third, do not treat AEP as a license to file late. The IRS fact sheet is explicit that AEP does not eliminate penalties under the law. It is administrative relief for taxpayers who otherwise have a strong compliance history.
Fourth, know the backup path. Taxpayers who do not qualify for AEP or First Time Abate may still request penalty relief based on reasonable cause. That is a different standard, and the IRS reviews those requests based on the facts and circumstances.
Why the transition is easy to misread
The old and new systems overlap for a short time. The IRS says First Time Abate still applies to eligible 2024 tax year returns, eligible 2025 quarterly returns, eligible 2025 tax year returns processed before AEP starts and eligible 2026 quarterly returns processed before AEP starts. For original returns with due dates on or after Jan. 1, 2027, First Time Abate is expected to be replaced by AEP.
That means two taxpayers with similar facts could have different next steps depending on when a return is processed and which tax period the penalty notice covers. One may receive automatic relief. Another may still need to ask for First Time Abate. A third may need to make a reasonable-cause case.
The best move is to slow down enough to classify the notice before paying, appealing or calling. Identify the penalty. Identify the tax period. Identify whether the return is original and eligible. Then decide whether the notice shows automatic relief, a penalty that may still qualify for First Time Abate during the transition, or a penalty that needs a different response.
Bottom line
AEP is a taxpayer-friendly change, but it is not blanket forgiveness. It helps people and businesses with a history of timely compliance avoid certain penalties after a one-time problem. If an IRS penalty notice arrives in 2026, check whether the new automatic process should apply before you pay a penalty, and keep the notice deadline in view while you do it.
