IRS Automatic Penalty Relief: What AEP Means for Eligible Taxpayers

The IRS is changing how many taxpayers receive penalty relief. In IR-2026-83, released July 8, 2026, the IRS announced a new Automatic Exemption from Penalty, or AEP, that will replace the long-standing First Time Abatement process for eligible taxpayers.

For years, many individuals and businesses qualified for First Time Abatement but never received it because they did not know to ask. AEP is intended to solve that access problem. When IRS systems show that a taxpayer has a timely compliance history, qualifying penalties generally will not be assessed during return processing.

That is a meaningful administrative improvement. It is not, however, a reason to relax filing, payment, deposit, or notice-response controls.

What changed with AEP?

The IRS expects AEP to begin in summer 2026. Under the new administrative penalty relief process, AEP applies to eligible original returns beginning with 2025 tax year returns, 2026 quarterly returns, and future tax periods.

A taxpayer generally qualifies if IRS records show timely filing and timely payment for the three prior years. For quarterly returns, the taxpayer generally needs 12 consecutive quarters of timely filing and payment history.

When the taxpayer qualifies, the IRS will automatically prevent assessment of certain penalties during processing. The taxpayer does not need to call the IRS, send a written request, or file Form 843 solely to obtain this automatic relief. The IRS says it will issue a notice confirming that AEP was granted.

Which penalties are covered by AEP

AEP is designed to cover three common penalty categories:

For businesses, the failure-to-deposit category can be especially relevant for payroll tax deposits. Employers should still treat payroll tax compliance as a high-priority control area because AEP does not erase the underlying tax, interest, or any penalties outside the program.

Which returns may qualify

The IRS administrative relief page identifies several return series eligible for AEP consideration, including Forms 1040, 1065, 1120, and employment and payroll returns such as Forms 940, 941, 943, 944, 945, and CT-1.

Not all returns are eligible. The IRS release explains that information returns and returns filed only because of specific transactions or infrequent events generally are not covered. Examples include Form 706, U.S. Estate Tax Return, and Form 709, United States Gift Tax Return.

That limitation deserves attention for high-net-worth individuals, estates, trusts, closely held businesses, and families with significant transfer tax reporting. A clean income tax filing history may help with eligible return types, but it does not automatically protect every penalty exposure.

First Time Abatement is being phased out

First Time Abatement has historically required action by the taxpayer or advisor. The taxpayer generally had to request relief after a penalty was assessed, often by calling the IRS or submitting a written request.

The IRS will begin phasing out First Time Abatement during summer 2026 as AEP comes online. During the transition, some qualifying taxpayers may still receive penalty notices for eligible 2025 tax year returns or 2026 quarterly returns. If that happens, the notice should not be ignored. Taxpayers who believe they qualify may still need to contact the IRS to request First Time Abatement during the transition period.

For eligible returns with original due dates on or after January 1, 2027, AEP is expected to replace First Time Abatement.

What taxpayers should still review

Automatic relief is helpful, but it depends on IRS records. Those records may not reflect every extension, payment, abatement, adjustment, entity-level issue, or deposit history the way a taxpayer expects.

A practical review should include:

Whether the return type is eligible for AEP
Whether the return is an original return
Whether the prior three years, or 12 quarters, show timely filing and payment
Whether a prior penalty was assessed and later removed for reasonable cause or IRS error
Whether a business has additional failure-to-deposit history
Whether the IRS notice confirms AEP or shows an assessed penalty
Whether tax and interest remain due even after penalty relief

For partnerships, S corporations, corporations, employers, and closely held groups, the analysis should be done by taxpayer and return type. Entity-level relief does not necessarily resolve owner-level penalties, and owner-level compliance does not necessarily cure an entity filing or deposit issue.

Reasonable cause still matters

Taxpayers who do not qualify for AEP may still request penalty relief for reasonable cause. That review is based on the facts and circumstances, including whether the taxpayer acted with ordinary care and prudence but was unable to comply.

Reasonable-cause requests should be supported with specific documentation. The stronger file usually explains what happened, when it happened, how it prevented timely compliance, what the taxpayer did to correct the issue, and what controls are now in place to prevent recurrence.

How Aura Advisors can help with IRS penalty relief

AEP should reduce unnecessary IRS calls and make penalty relief more consistent for taxpayers with strong compliance histories. The planning opportunity is to confirm that the automatic result matches the taxpayer’s facts, not to assume every penalty notice has been solved.

Aura Advisors helps individuals, business owners, employers, partnerships, corporations, and high-net-worth families evaluate IRS penalty notices, confirm AEP eligibility, pursue First Time Abatement during the transition period, and prepare reasonable-cause requests when automatic relief is not available. We also help clients improve filing, payment, and deposit processes so penalty relief is not the only line of defense.

For More Reading:

Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.