IRS Launches Automatic Exemption from Penalty to Replace Manual Process

The Internal Revenue Service is introducing the Automatic Exemption from Penalty (AEP) program starting in the summer of 2026. The new system automatically waives penalties for failure to file, failure to pay, and failure to deposit for eligible taxpayers, removing the requirement to file a formal request. This process replaces the First Time Abate (FTA) program, which the agency will phase out during the summer of 2026 before AEP fully takes over for returns due on or after January 1, 2027.

To qualify, taxpayers generally must demonstrate a three-year history of compliance or 12 consecutive quarters of timely filing and payment for quarterly filers. The program applies to eligible original returns for tax year 2025 and 2026 quarterly returns. While providing relief from penalties, the agency noted that taxpayers remain responsible for underlying taxes and interest. Certain filings, such as estate and gift tax returns, remain ineligible for the exemption, though taxpayers may still request relief based on reasonable cause.

National Taxpayer Advocate Erin Collins estimated that over 1.5 million taxpayers would have qualified for relief in fiscal year 2025 under this system, compared to only 220,000 who received waivers through the previous manual process. Simultaneously, the agency is increasing enforcement against tax avoidance schemes involving fraudulent charitable trust arrangements and launching a nationwide campaign to combat tax-related identity theft.