The IRS Is Making Penalty Relief Automatic: What Taxpayers Need to Know About AEP

Receiving an IRS penalty notice can be frustrating, especially when the taxpayer generally files and pays on time but misses one deadline.

Previously, taxpayers who qualified for the IRS First Time Abate program typically had to contact the IRS and request relief. That meant taxpayers needed to know the relief existed, understand that they might qualify and successfully reach the IRS.

The IRS is now changing that process.

In July 2026, the IRS announced the Automatic Exemption from Penalty program, or AEP. The program is expected to begin during summer 2026 and will allow the IRS to automatically prevent certain penalties from being assessed when an eligible taxpayer has a qualifying history of timely compliance.

What Is the Automatic Exemption from Penalty?

AEP is an administrative penalty-relief process built into the IRS’s original return processing system.

When an eligible return is processed, the IRS will review the taxpayer’s compliance history. If all applicable requirements are met, certain penalties will not be assessed.

The taxpayer will not need to:

• Submit a separate application
• Complete an additional form
• Call the IRS to request relief
• Provide a written explanation simply to receive AEP

When AEP applies, the IRS will send a notice explaining that the applicable penalty was not assessed because of the taxpayer’s timely compliance history.

Which Tax Periods Are Included?

The IRS says AEP will begin with:

• Eligible original 2025 tax-year returns
• Eligible 2026 quarterly returns
• Eligible returns for subsequent tax periods

AEP applies during the processing of an eligible original return. It should not be viewed as a general waiver covering every previously assessed penalty or every type of tax return.

Which Returns May Be Eligible?

The IRS currently identifies the following return series as eligible for AEP consideration:

• Forms 1040
• Forms 1065
• Forms 1120
• Forms 940
• Forms 941
• Forms 943
• Forms 944
• Forms 945
• Form CT-1

Being included in an eligible return series does not automatically guarantee relief. The taxpayer must also meet the applicable compliance-history and penalty requirements.

What Penalties Can AEP Cover?

Depending on the return and taxpayer, AEP may prevent the assessment of certain:

1. Failure-to-file penalties
   These may apply when an eligible return is not filed by its required deadline.
2. Failure-to-pay penalties
   These may apply when tax shown or required to be shown on a return is not paid by the applicable deadline.
3. Failure-to-deposit penalties
   These may apply when required federal tax deposits are not made in the correct amount, on time or using the required method.

For eligible individual taxpayers, AEP generally relates to certain failure-to-file and failure-to-pay penalties. Eligible business taxpayers may also receive relief from certain failure-to-deposit penalties.

Who Qualifies for AEP?

A taxpayer must have a qualifying history of timely compliance.

Generally, this means:

• The same type of return was filed on time for the previous three years
• Quarterly filers have 12 consecutive quarters of timely compliance
• The taxpayer paid the required tax during the applicable lookback period
• No disqualifying penalties were assessed during that period

A taxpayer may still satisfy the penalty-history requirement when a previous penalty was removed because of reasonable cause or an IRS error. Estimated-tax penalties are treated differently and generally do not disqualify the taxpayer under this particular eligibility test.

Business taxpayers must meet additional requirements. For example, a business generally will not qualify if the IRS waived failure-to-deposit penalties four or more times during the previous three years or 12 quarters. Relief is also unavailable when the failure-to-deposit penalty resulted from avoiding the Electronic Federal Tax Payment System requirements.

A three-year or 12-quarter compliance history is therefore an important requirement but it is not the only requirement.

Does AEP Eliminate the Tax or Interest Owed?

No.

AEP prevents certain eligible penalties from being assessed. It does not eliminate:

• The underlying tax
• Interest due on unpaid tax
• Penalties that are outside the AEP program
• The taxpayer’s ongoing filing, payment and deposit obligations

Taxpayers should continue filing returns, paying taxes and making required deposits by their normal deadlines. AEP is intended to help generally compliant taxpayers with an occasional issue, not provide permission to disregard tax deadlines.

What Penalties and Returns Are Not Covered?

AEP does not apply to every penalty.

The IRS specifically states that AEP generally does not cover:

• Information-return penalties
• Accuracy-related penalties
• Daily delinquency penalties
• Estimated-tax underpayment penalties
• Other penalties outside the AEP program

Returns associated with one-time transactions or infrequent events are also generally excluded. Examples include Form 706, the United States Estate Tax Return, and Form 709, the United States Gift Tax Return.

This distinction is especially important for businesses. Penalties connected with Forms 1099 and other information returns are generally not covered by AEP.

What Is Happening to First Time Abate?

AEP will gradually replace the IRS’s existing First Time Abate administrative waiver.

Under First Time Abate, eligible taxpayers generally had to contact the IRS and ask for penalty relief after a penalty had been assessed. Under AEP, the IRS will identify qualifying taxpayers during original return processing and prevent the applicable penalty from being assessed.

During the transition, First Time Abate will remain available for certain returns, including:

• Eligible 2024 tax-year returns
• Eligible 2025 quarterly returns
• Eligible 2025 tax-year returns processed before AEP begins
• Eligible 2026 quarterly returns processed before AEP begins

For eligible original returns with due dates on or after January 1, 2027, AEP will replace First Time Abate.

What Should You Do If You Receive a Penalty Notice?

Do not ignore it.

During the transition to AEP, some taxpayers who might otherwise qualify for relief may still receive penalty notices because their returns were processed before the automatic system became available.

Review the notice carefully. If you believe the penalty is incorrect or that you qualify for relief, contact the IRS using the telephone number shown on the notice.

Depending on the return, processing date and circumstances, relief may be available through:

• Automatic Exemption from Penalty
• First Time Abate
• Reasonable-cause relief
• Another administrative or statutory relief provision

Taxpayers who do not qualify for AEP may still request reasonable-cause relief when their facts and circumstances support it.

Why This Matters for Businesses

The main benefit of AEP is not that businesses can become less careful. The benefit is that a generally compliant business may no longer have to navigate a manual IRS process to receive certain first-time penalty relief.

For eligible taxpayers, the new process may mean:

• Fewer calls and letters to the IRS
• Less uncertainty about whether relief must be requested
• Earlier confirmation that a covered penalty was not assessed
• More consistent treatment of taxpayers with similar compliance histories

However, AEP does not protect businesses from every filing or reporting risk. Vendor documentation, Forms W-9 and Forms 1099 remain separate compliance responsibilities. Information-return penalties generally fall outside the AEP program.

Where GetW9 Fits

AEP does not remove the need to maintain accurate vendor tax information.

Businesses still need a reliable process for collecting legal names, taxpayer identification numbers, tax classifications and signed Forms W-9 from applicable U.S. vendors and contractors.

GetW9 helps businesses and accounting teams securely request, collect, organize and track vendor W-9s before information-return deadlines arrive.

That can help teams identify:

• Vendors who have not submitted a W-9
• Incomplete vendor records
• Forms that require follow-up
• Documentation gaps that could delay 1099 preparation

AEP may simplify certain IRS penalty-relief procedures, but it does not replace proper vendor documentation or accurate information reporting.

The Bottom Line

The IRS’s Automatic Exemption from Penalty program represents a meaningful change in how certain first-time penalties are handled.

Beginning with eligible 2025 tax-year returns and 2026 quarterly returns, qualifying taxpayers may receive automatic relief from certain failure-to-file, failure-to-pay and failure-to-deposit penalties. No separate request will be required when AEP applies.

But the relief is limited. Taxpayers must meet the IRS’s compliance-history requirements, the return must be eligible, and unpaid tax, interest and penalties outside the program remain due.

Businesses should continue filing, paying, depositing and reporting on time and should not assume AEP protects them from information return penalties.

GetW9 helps businesses build the vendor-documentation side of that compliance process by making W-9 collection easier to manage, track and complete.

This article is provided for general educational purposes and does not constitute tax or legal advice. Consult a qualified tax professional regarding your specific circumstances.