Nothing ruins a perfectly fine day quite like an IRS notice showing up in the mail. Your stomach drops before you even open the envelope.

But occasionally the IRS does something that makes life a little bit easier for taxpayers, and this is one of those times. It’s called the Automatic Exemption from Penalty (AEP).

What is the Automatic Exemption from Penalty?

The IRS recently rolled out a new program that automatically waives certain penalties for taxpayers with a track record of filing returns and paying taxes on time. It applies to originally filed returns for the 2025 tax year, 2026 quarterly returns, and tax filings going forward.

AEP replaces a program called First Time Abate (FTA), which has been around for years. But FTA required you (or your tax advisor) to know about the program and request the relief, usually by phone or letter.

AEP makes the process automatic. If you qualify, the IRS applies the relief on its own and sends you a confirmation notice. You don’t have to fill out a form or spend time on hold with the IRS.

AEP can waive three types of penalties:

1. Failure to file
2. Failure to pay
3. Failure to deposit

It doesn’t apply to information returns, like 1099s or W-2s, or one-off filings like estate or gift tax returns. It also can’t take away accuracy-related penalties or daily delinquency penalties.

And AEP can’t erase the tax you owe or the interest that accrues. It only removes the penalty.

Who qualifies for AEP?

To qualify for AEP, you generally need three prior years of timely filing and payments. For quarterly filed returns, that’s 12 consecutive clean quarters.

In other words, this isn’t a free pass for chronic late filers. Instead, it rewards business owners and individual taxpayers who’ve been doing the right thing but had one rough patch, like a late payroll deposit during a cash flow crunch or a filing deadline that slipped through the cracks during a busy time of year.

The downside of AEP

The AEP program has many upsides, but it’s not universally positive. That’s because under the First Time Abatement system, you had a choice. If the IRS assessed a penalty and you had a legitimate reasonable cause for missing the deadline or payment, like a natural disaster, a serious illness, or a death in the family, you could argue reasonable cause. That way, you kept your FTA in your back pocket for a future year when you might need it and not have a reasonable cause to fall back on.

AEP takes that choice away. Because the relief is automatic, the IRS never assesses the penalty in the first place. And you can’t argue reasonable cause to remove a penalty that doesn’t exist yet. There’s nothing to save because the system decided for you before you got a say.

For most taxpayers, this isn’t an issue. If you rarely run into penalty trouble, having the IRS handle it automatically is a win. But if you occasionally have a rough quarter and want to strategize with your tax advisor about which penalty relief option makes the most sense for your specific situation, that flexibility is narrow now.

Your action plan

Not much changes in your day-to-day with the new program. Keep filing and paying on time. Beyond that:

• Still open and read every IRS notice carefully. Automatic penalty relief doesn’t mean automatic accuracy. Confirm the IRS applied the relief if you think you qualified.
• Keep good records of your filing and payment history. The right documentation comes in handy if the IRS doesn’t waive a penalty as it should.
• Call us before you assume the IRS has it handled. If you get an unexpected penalty notice, we can review it before you decide how to respond.

The IRS plans to continue rolling out the AEP over the coming months and fully replace the FTA program for returns due on or after January 1, 2027. Until then, some situations may still require the old-fashioned request-based process.

If a penalty notice arrives in your mailbox, don’t panic. Contact NewWay Accounting. We can help you figure out the right path forward.