For years, businesses seeking IRS penalty relief often had to contact the IRS, explain their circumstances, and request that certain penalties be waived. Even when they had a strong history of tax compliance, the process could involve additional paperwork, longer wait times, and unnecessary administrative effort.
That process is now changing.
Beginning in Summer 2026, the IRS is introducing the Automatic Exemption from Penalty (AEP), a new administrative process that automatically grants relief for certain eligible penalties. Instead of requiring taxpayers to request relief in many cases, the IRS reviews a taxpayer’s compliance history and applies the exemption automatically when the eligibility requirements are met.
The change reflects the IRS’s broader effort to simplify tax administration while encouraging timely filing, payment, and deposit compliance. However, automatic IRS penalty relief does not mean penalties disappear altogether. Businesses must still maintain a consistent record of filing returns on time, paying taxes when due, and meeting federal tax deposit requirements to qualify.
This guide breaks down how the AEP program operates, the tax forms and penalties it applies to, the eligibility requirements businesses must meet, how it differs from the former First Time Abate (FTA) process, and the key practices that help maintain a strong compliance record.
Why Do Businesses Receive IRS Penalties?
Before understanding how the Automatic Exemption from Penalty (AEP) works, it’s important to know why businesses receive penalties in the first place. The IRS imposes penalties to encourage timely tax compliance and ensure taxpayers meet their filing, payment, and reporting obligations.
Many penalties are not the result of intentional non-compliance. They often arise from administrative oversights, cash flow challenges, or misunderstandings about filing requirements. While the new AEP program simplifies access to IRS penalty relief, it does not prevent penalties from being assessed initially.
Some of the most common reasons businesses incur IRS penalties include:
• Filing tax returns after the deadline: Late filing can trigger a Failure-to-File penalty, even if no tax is ultimately owed.
• Paying taxes late: Taxes that remain unpaid after the due date may result in a Failure-to-Pay penalty until the balance is settled.
• Missing federal tax deposits: Delayed or missed payroll tax deposits can lead to Failure-to-Deposit penalties.
• Reporting errors: Incorrect taxpayer information, mathematical mistakes, or incomplete tax reporting may result in IRS notices and penalties.
• Cash flow challenges: Financial constraints may delay tax payments, but penalties can still apply unless the business qualifies for relief.
The new AEP program simplifies access to IRS penalty relief for eligible taxpayers, but it does not prevent penalties from being assessed. Businesses must still meet their filing, payment, and deposit obligations to qualify for automatic relief.
What Is Automatic Exemption from Penalty (AEP)?
The Automatic Exemption from Penalty (AEP) is a new IRS administrative process that automatically grants IRS penalty relief to eligible taxpayers who have demonstrated a consistent history of timely tax compliance.
Traditionally, taxpayers who qualified for administrative relief often had to contact the IRS and request First Time Abate (FTA) after a penalty had already been assessed. This required additional paperwork, phone calls, or written requests, even when the taxpayer met all the eligibility requirements.
With AEP, that process becomes much simpler. Instead of waiting for a taxpayer to request relief, the IRS automatically reviews the taxpayer’s compliance history when an eligible penalty is assessed. If the taxpayer satisfies the program’s requirements, the IRS removes the qualifying penalty without requiring a separate application.
As part of its Summer 2026 rollout, the IRS extended AEP to the following tax returns and related penalties:
• Eligible 2025 individual and business income tax returns
• Eligible employment tax returns beginning with the first quarter of 2026
• Other qualifying returns processed after implementation
This change represents one of the IRS’s most significant administrative updates to IRS penalty relief in recent years. By automating the process, the agency aims to reduce processing delays, improve consistency, and allow IRS representatives to focus on more complex taxpayer issues.
Which Penalties Does AEP Cover?
The new program covers several common tax penalties IRS may assess against businesses and individuals. As follows:
• Failure-to-File Penalty: Applies when a required tax return is filed after the due date.
• Failure-to-Pay Penalty: Applies when taxes are not paid by the required deadline.
• Failure-to-Deposit Penalty: Applies when required federal tax deposits are not made on time.
Eligible taxpayers may receive IRS penalty relief for these penalties if they meet the program’s compliance requirements.
Returns That May Qualify
| Form | Purpose |
|---|---|
| Form 1040 | Individual income tax return |
| Form 1065 | Partnership return |
| Form 1120 | Corporate income tax return |
| Form 940 | Federal unemployment tax return |
| Forms 941, 943, 944, 945 | Employment tax returns |
| Form CT-1 | Railroad retirement taxes |
While these returns are eligible for consideration, IRS penalty relief is not granted solely because a particular form is filed. The IRS also evaluates the taxpayer’s compliance history and the specific circumstances surrounding the penalty before applying the exemption.
Who Qualifies for AEP?
Not every taxpayer automatically qualifies for the Automatic Exemption from Penalty (AEP). The IRS reviews a taxpayer’s recent compliance history to determine whether they are eligible for automatic IRS penalty relief. Businesses that consistently file returns, pay taxes, and make required deposits on time are the most likely to qualify.
While the IRS determines eligibility automatically, understanding the requirements can help businesses maintain compliance and reduce the risk of future penalties.
AEP Eligibility Checklist
To qualify for AEP, businesses generally must meet the following conditions:
• Maintain a strong compliance record: The IRS generally examines the previous three tax years, or the last 12 consecutive quarters for employment tax returns, to verify that all required returns were submitted on time.
• Meet payment obligations: Taxes should be paid by the applicable due date or through an approved payment arrangement when required under IRS rules.
• Make timely federal tax deposits: Employers must make payroll tax deposits according to their assigned deposit schedule.
• Resolve outstanding compliance issues: Businesses with unresolved filing requirements or other significant compliance problems may not qualify for automatic relief.
• Use EFTPS when required: Taxpayers should follow IRS electronic payment requirements and should not intentionally avoid using the Electronic Federal Tax Payment System (EFTPS) where applicable.
• Limit Failure-to-Deposit waivers: Business taxpayers generally cannot have had the Failure-to-Deposit penalty waived four or more times during the same three-year (or 12-quarter) lookback period.
Meeting these conditions improves the likelihood of receiving IRS penalty relief, but eligibility is ultimately determined by the IRS based on the specific penalty and the taxpayer’s compliance record.
Who Does Not Qualify?
Some penalties and filing situations fall outside the scope of AEP. Businesses may not qualify if:
• The penalty relates to an information return.
• The penalty is a Daily Delinquency Penalty.
• The return is an infrequently filed or event-based return that is excluded from the program.
• The penalty is an accuracy-related penalty or another penalty type not identified by the IRS as eligible for AEP.
If your business is not eligible for AEP, it does not necessarily mean penalty relief is unavailable. Depending on the circumstances, you may still request IRS penalty relief by demonstrating reasonable cause, such as the inability to comply due to circumstances beyond your control.
Does AEP Mean You Can Ignore Filing Deadlines?
No. One of the biggest misconceptions about AEP is that it eliminates the need to file or pay taxes on time. The program does not prevent penalties from being assessed, nor does it waive penalties for every taxpayer.
Instead, the program benefits businesses that have maintained a consistent record of timely tax compliance. Continuing to file returns on time, make tax deposits when due, and maintain accurate financial records remains essential for preserving eligibility for future IRS penalty relief.
Key takeaway: AEP is designed to reward good compliance, not replace it. Businesses that consistently meet their tax obligations are the ones most likely to benefit from automatic penalty relief.
First Time Abate vs. Automatic Exemption from Penalty
The biggest practical change is that eligible taxpayers generally no longer need to request relief manually.
| Feature | First Time Abate (FTA) | Automatic Exemption from Penalty (AEP) |
|---|---|---|
| How relief is granted | Taxpayer must request relief from the IRS. | The IRS automatically reviews eligibility and applies relief when the requirements are met. |
| Penalty assessment | The penalty is assessed first, then automatically waived for eligible businesses. | No penalty assessment is made. |
| IRS contact required | Generally requires contacting the IRS or submitting a request. | No separate request is generally required for eligible penalties. |
| When relief is applied | After the penalty has been assessed and the request is approved. | During the IRS’s penalty review process for eligible taxpayers. |
| Eligibility review | Based on the taxpayer’s compliance history and IRS requirements. | Based on the taxpayer’s compliance history and IRS eligibility criteria. |
| Administrative effort | Higher, as taxpayers must initiate the process. | Lower, because the IRS handles the review automatically. |
| Failure-to-pay penalty | May continue to accrue until the tax is fully paid or FTA relief is granted. | Does not accrue and is not assessed on unpaid tax when AEP requirements are met. |
| Interest on unpaid taxes | Interest generally continues to accrue. | Interest generally continues to accrue unless otherwise provided by law. |
For many businesses, the new system makes IRS penalty relief easier to receive when they already have a strong compliance record.
What Businesses Should Do Now
The Automatic Exemption from Penalty (AEP) makes receiving IRS penalty relief easier for eligible taxpayers, but businesses must continue meeting their tax obligations to remain eligible. Following the below best practices can help strengthen your compliance history and reduce the risk of future IRS penalties:
• File tax returns on time: Timely filing is one of the key factors the IRS considers when determining AEP eligibility.
• Pay taxes and make federal deposits promptly: Meeting payment and deposit deadlines helps maintain a strong compliance record.
• Maintain accurate financial records: Well-organized books reduce reporting errors and support timely tax filings.
• Review IRS notices carefully: Check all IRS correspondence to ensure any eligible IRS penalty relief has been applied correctly.
• Monitor your compliance history: Regularly reviewing your filing and payment record can help you stay eligible for automatic relief.
• Explore reasonable cause relief if needed: If you don’t qualify for AEP, you may still be eligible for penalty relief under the IRS’s reasonable cause provisions.
The AEP program rewards businesses that prioritize timely filing, accurate reporting, and consistent tax compliance, making these practices more valuable than ever.
How MASPartner Can Help
AEP eligibility is built through consistent tax compliance over time. Maintaining accurate financial records, meeting filing deadlines, and making timely tax deposits all contribute to the compliance history the IRS reviews when determining IRS penalty relief.
At MASPartner, we help businesses stay organized with reliable bookkeeping, proactive deadline tracking, and ongoing accounting support. By strengthening these day-to-day financial processes, businesses can reduce avoidable IRS penalties and maintain the records needed for long-term tax compliance.
If you’ve received a penalty notice or need help reviewing your filing history, our team can also help organize your records and determine whether you may qualify for relief under AEP or other IRS provisions.
FAQs
1. Will I receive a notice if my penalty is waived under AEP?
Yes. If the IRS grants relief under the Automatic Exemption from Penalty program, it will generally issue a notice confirming that the eligible penalty has been removed or adjusted. Businesses should review all IRS correspondence carefully and keep these notices for their records.
2. Does filing a tax extension affect AEP eligibility?
Filing a valid extension does not automatically affect your eligibility, provided the return is filed by the extended due date. However, an extension to file does not extend the deadline to pay taxes owed, and late payments may still result in applicable penalties.
3. Can a business receive AEP more than once?
AEP eligibility depends on the IRS’s compliance review for each eligible tax period. Businesses should maintain consistent filing and payment compliance to remain eligible under the program.
4. What should I do if I receive a penalty notice but believe I qualify for AEP?
Review the notice carefully and compare it with your filing and payment history. If you believe the penalty should have been waived, contact the IRS or consult a qualified tax professional to determine whether further action is required.
5. Does AEP apply to state tax penalties?
No. The Automatic Exemption from Penalty program applies only to eligible federal tax penalties administered by the IRS. State tax agencies have their own penalty relief rules and procedures.
6. Can I still request penalty relief if AEP does not apply?
Yes. Businesses that do not qualify for AEP may still request relief under the IRS’s reasonable cause provisions if they can demonstrate that circumstances beyond their control prevented timely compliance.
Conclusion
The IRS’s Automatic Exemption from Penalty (AEP) marks an important shift in how eligible taxpayers receive IRS penalty relief, making the process simpler for businesses with a strong history of tax compliance. While the program reduces the need to request penalty relief manually, maintaining accurate records, filing returns on time, and meeting payment deadlines remain essential for eligibility.
Book a free consultation today to better understand how the new AEP program fits into your overall tax compliance strategy. With the right financial processes in place, businesses can stay ahead of filing deadlines, reduce avoidable penalties, and focus on long-term growth.
