The IRS is retiring First Time Abate. Starting this summer, a new automatic process called Automatic Exemption from Penalty (AEP) applies failure-to-file, failure-to-pay, and failure-to-deposit relief without a client request, for taxpayers with three years of on-time filing and paying (or 12 consecutive quarters for quarterly filers). AEP applies to eligible tax year 2025 returns and 2026 quarterly returns onward, and fully replaces First Time Abate for returns with original due dates on or after January 1, 2027 (IR-2026-83, July 8, 2026). Firms should update their penalty-notice workflow now, before the transition window closes.

What changed

First Time Abate has been the IRS's most common administrative penalty relief: a taxpayer (or their preparer) with a clean compliance history requests removal of certain penalties. Automatic Exemption from Penalty (AEP) flips that. The IRS said AEP is "designed to simplify the process and reduce burden for those with a timely compliance history," and IRS Chief Executive Officer Frank J. Bisignano called it a way to recognize that "taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted." Where AEP applies, the IRS grants the relief on its own and sends a notice confirming it. No 843 request, no phone call, no preparer follow-up needed.

Who qualifies

A taxpayer qualifies for AEP if they have a history of timely filing the return and paying any tax due in the three prior years, or 12 consecutive quarters for quarterly returns. AEP applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, plus future periods.

Not every return is in scope. The IRS specifically excludes information returns and returns filed only in response to a specific transaction or infrequent event, such as Form 706 (Estate Tax Return) or Form 709 (Gift Tax Return). Those stay on the standard relief-request path.

Which penalties AEP covers

When a return qualifies, AEP prevents assessment during processing of three penalties: failure to file, failure to pay, and failure to deposit. AEP does not touch the underlying tax or interest, and it does not cover penalties outside those three categories. Any tax, interest, and non-covered penalties are still owed.

Timeline: phased in this summer, full switch January 1, 2027

AEP is a systemic administrative program expected to begin this summer (2026). The IRS will phase out First Time Abate over the same window. During the transition, some qualifying taxpayers may still receive a penalty notice for an eligible tax year 2025 return or 2026 quarterly return even though AEP should apply — if that happens, the taxpayer (or preparer) can still contact the IRS to request First Time Abate directly. AEP becomes the sole path and fully replaces First Time Abate for returns with original due dates on or after January 1, 2027.

What this means for your firm's workflow

Two concrete changes for a compliance team this summer:

• Don't reflexively file a First Time Abate request the moment a penalty notice lands. Check whether the client's return should already qualify for AEP before spending staff time on a 843-style request — if AEP applied, the notice should say so.

• Flag clients who get a penalty notice during the transition window without an AEP confirmation. Those are the ones who still need an active First Time Abate request under the old process while the two systems overlap through year-end 2026.

Reasonable cause relief is unaffected — taxpayers who don't qualify for AEP (or whose penalty isn't one of the three covered categories) can still request relief that way, reviewed case by case.

Notice-driven work like this is exactly where a lot of firms lose track of who's mid-process and who's already resolved. If your team is managing a growing volume of client notices and return intake by hand, see how SignalsHQ helps CPA firms scale tax prep capacity without losing control of the workflow.

FAQ

What is Automatic Exemption from Penalty (AEP)?
A new IRS administrative program that automatically applies failure-to-file, failure-to-pay, and failure-to-deposit penalty relief to taxpayers with a clean three-year (or 12-quarter) compliance history, without requiring a request.

Does AEP replace First Time Abate?
Yes. The IRS is phasing out First Time Abate during summer 2026; AEP fully replaces it for returns with original due dates on or after January 1, 2027.

When does AEP take effect?
AEP is expected to begin this summer (2026) and applies to eligible tax year 2025 returns, 2026 quarterly returns, and future periods.

What penalties does AEP cover?
Failure to file, failure to pay, and failure to deposit. It does not cover other penalties, and tax and interest are still owed.

What if a client doesn't qualify for AEP?
They can still request penalty relief based on reasonable cause, reviewed by the IRS case by case, the same as before.

Source: IR-2026-83, IRS Newsroom, July 8, 2026.