The IRS has announced a significant shift in how it will administer penalty relief beginning in 2026, introducing a streamlined system designed to automatically recognize taxpayers with a strong history of timely filing and payment. This new approach, called the Automatic Exemption from Penalty (AEP), marks the end of the long‑standing First Time Abate program and represents a broader effort to simplify compliance for individuals and businesses that consistently meet their tax obligations.

Under AEP, eligible taxpayers will no longer need to request relief for certain penalties. Instead, the IRS will apply the exemption automatically during return processing when a filer demonstrates three consecutive years of timely filing and payment—or twelve consecutive quarters for quarterly filers. The system is scheduled to begin in the summer of 2026 and will apply to original returns beginning with tax year 2025 and 2026 quarterly returns, continuing into future tax periods.

The penalties covered under AEP include failure‑to‑file, failure‑to‑pay, and failure‑to‑deposit penalties. When a taxpayer qualifies, these penalties simply will not be assessed. The IRS will issue a notice confirming the exemption, eliminating the need for taxpayers to call, write, or submit a formal request.

This change is expected to affect a wide range of commonly filed returns. While the IRS has not yet published a definitive list of eligible forms, AEP is expected to apply to major income‑tax and employment‑tax returns that carry the covered penalties. These include:

• Form 1120 – U.S. Corporation Income Tax Return

• Form 1065 – Partnership Return

• Form 1040 – Individual Income Tax Return 

• Form 1041 – U.S. Income Tax Return for Estates and Trusts 

• Form 941 – Employer’s Quarterly Federal Tax Return 

• Form 940 – Employer’s Annual Federal Unemployment Tax Return

These forms should be considered likely eligible, but final confirmation will depend on forthcoming IRS guidance. Note that form 1120‑S the S Corporation income tax return is not part of AEP.

Several additional returns also carry failure‑to‑file or failure‑to‑pay penalties and may fall under AEP once the IRS publishes its full list. These include:

• Form 944 – Employer’s Annual Federal Tax Return 

• Form 943 – Agricultural Employer’s Tax Return

• Form 945 – Annual Return of Withheld Federal Income Tax 

• Form 1040‑SR – U.S. Tax Return for Seniors 

• Form 1040‑NR – Nonresident Alien Income Tax Return 

• Form 990‑T – Exempt Organization Business Income Tax Return

• Form CT-1 – Employer's Annual Railroad Retirement Tax Return

Information returns such as Forms 1099 and returns filed only for specific transactions or infrequent events, including Form 706 (Estate Tax Return) and Form 709 (Gift Tax Return), are not eligible for AEP.

Do You Qualify for the AEP? Check with a Qualified Tax Professional

As AEP is implemented, the IRS will begin phasing out First Time Abate. During the transition period in 2026, some taxpayers may still receive penalty notices for returns that would otherwise qualify for AEP. In those cases, First Time Abate may still be requested. Beginning with returns due on or after January 1, 2027, AEP will fully replace First Time Abate for eligible returns.

Taxpayers who do not qualify for AEP will continue to have access to penalty relief based on reasonable cause. The IRS will review these requests individually and notify taxpayers of the outcome. It is important to note that AEP prevents only the assessment of certain penalties; taxpayers remain responsible for any tax due, interest, and penalties not covered by the exemption.

The IRS describes this change as part of a broader effort to promote fairness, consistency, and voluntary compliance. By automatically recognizing taxpayers with a strong compliance history, AEP reduces administrative burden and ensures that relief is applied equitably.

Further guidance is expected, including a complete list of eligible forms and additional implementation details. As the IRS releases more information, taxpayers and practitioners will have clearer insight into how AEP will apply across different filing categories. If you are unsure if you qualify for the AEP or other IRS tax abatement.