IRS Automatic Penalty Relief (AEP): First-Time Abatement Is Being Replaced — What It Means for You
The IRS just announced that failure-to-file, failure-to-pay, and failure-to-deposit penalties will be waived automatically for eligible taxpayers — no phone call, no Form 843. Here's what changed, who qualifies, and the transition trap to watch for if you get a CP14 for your TY2025 return.
What is IRS Automatic Exemption from Penalty (AEP) and when does it replace First-Time Abatement?
AEP is a new IRS program announced in July 2026 that automatically suppresses failure-to-file, failure-to-pay, and failure-to-deposit penalties at return processing for taxpayers with three prior clean years — no request, no Form 843, no phone call. The IRS mails a notice confirming relief was granted. AEP began in summer 2026, applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, and fully replaces First-Time Penalty Abatement for returns with original due dates on or after January 1, 2027.
- AEP is automatic — the IRS applies it at return processing without a request.
- Covered penalties: failure-to-file, failure-to-pay, failure-to-deposit.
- Eligibility: timely filed and paid in the 3 prior tax years (12 consecutive clean quarters for quarterly filers).
- Covered returns: 1040, 1065, 1120, 940/941/943/944/945, CT-1.
- Fully replaces First-Time Abatement for returns with original due dates on/after Jan 1, 2027.
- Interest on the underlying tax is NOT waived — AEP only removes the penalties.
Source:IRS Newsroom — IRS Simplifies Penalty Relief (July 2026)
1. The transition trap (read this first)
During the 2026 phase-in, AEP-eligible taxpayers can still get penalty notices — including a CP14 — for TY2025 returns.
The IRS's systems don't flip overnight. AEP applies to eligible original returns beginning with tax year 2025, but during the summer-2026 phase-in some qualifying taxpayers may still receive penalty notices for TY2025 returns — and you'll have to ask for those penalties to come off. January 1, 2027 is the date AEP fully replaces First-Time Abate, for returns originally due on or after that date.
If you get a CP14 or similar penalty notice for TY2025:
- Call the number on the notice and say: "I'd like to request First-Time Penalty Abatement for tax year 2025." The rep can grant it on the call if you have three prior clean years.
- Or file Form 843 (Claim for Refund and Request for Abatement) — write "First-Time Abate" at the top and attach the notice.
Do not pay a penalty AEP-eligible history should erase. See the CP14 response guide for the full script, and use the IRS Penalty Calculator to size the penalty before you call.
AEP eligibility quick-check
Four questions (two more for business and employment-tax returns), answered in your browser. Nothing is sent anywhere, and nothing is stored. This is an educational screen against the published AEP criteria, not an IRS determination.
Which return is it?
Which kind of return is this?
1. For each of the three tax periods before this one, did you file the return on time (including extensions)?
Annual filers: the three prior tax years. Quarterly employment-tax filers: the twelve consecutive quarters before this one.
2. In those same three prior periods, was every penalty other than the estimated-tax penalty either never assessed or later removed for reasonable cause or IRS error?
Estimated-tax underpayment penalties under §6654 do not count against you.
3. Is the return an eligible original return (Form 1040, 1065, 1120, 940/941/943/944/945, CT-1) rather than an information return or an event-driven filing?
Form 706, Form 709, 1099/W-2 information returns, and similar event-driven filings are outside AEP.
Pick the return period and type and answer every question to see where you stand.
AEP vs First-Time Abate — side by side
The eligibility test barely changes. What changes is who does the work, and when. AEP applies to TY2025 returns and 2026 quarterly returns onward, and fully replaces FTA for returns with an original due date on or after January 1, 2027 (IR-2026-83); until then, FTA remains available if a qualifying return still draws a penalty notice.
| Feature | First-Time Abate (FTA) | Automatic Exemption (AEP) |
|---|---|---|
| How you get it | You ask — phone call to the IRS or Form 843 | Applied by the IRS at return processing; no request |
| Timing | After the penalty is assessed and a notice arrives | Before a penalty notice is ever issued |
| Clean-history test | 3 prior years with no §6651 penalties | Same 3-year test (12 clean quarters for quarterly filers) |
| Current-year payment | Tax paid or under an installment agreement | Not required — the failure-to-pay penalty does not accrue on unpaid tax |
| Penalties covered | Failure-to-file, failure-to-pay, failure-to-deposit | Same three penalties |
| Interest | Not waived (only interest attributable to an abated penalty) | Not waived — AEP removes penalties only |
| Once-per-lifetime? | No — but only one clean-history window at a time | No — re-earned whenever the 3-year window is clean |
| Applies to returns due | Prior periods, plus TY2025 and 2026 quarterly returns that still drew a penalty notice; not available for returns originally due on or after January 1, 2027 | TY2025 returns and 2026 quarterly returns onward; the sole remedy for returns originally due on or after January 1, 2027 |
Transition trap: a TY2025 Form 1040 is inside AEP's scope, but during the summer-2026 phase-in it can still draw a CP14 with a penalty. If it does, don't wait for AEP to fix it — call the number on the notice and ask for First-Time Abate. See the CP14 guide for the script.
2. What changed — and why it's a taxpayer win
First-Time Penalty Abatement (FTA) has existed since 2001, but it required taxpayers to know it existed and ask for it. Study after study — including years of advocacy from the National Taxpayer Advocate — showed that the majority of eligible taxpayers never claimed it and simply paid penalties they should have had waived.
Under Automatic Exemption from Penalty (AEP), the eligibility check runs at return processing. When your record shows three prior clean tax years (or twelve clean quarterly filings for employment returns), the IRS suppresses the penalty before it's ever assessed and mails a notice confirming the relief. No knowledge-tax on the taxpayer, no paperwork.
The National Taxpayer Advocate has recommended exactly this design for years, arguing the ask-only structure penalized unrepresented taxpayers. AEP is a rare administrative simplification that unambiguously benefits filers.
3. Am I eligible? The 3-year clean-history test
You qualify for AEP if:
- Individuals & entities (annual returns): You had a filing requirement in each of the three tax years preceding the current return, you filed all three on time, and no penalty other than the estimated-tax penalty was assessed in that window (or any that was assessed was later removed for reasonable cause or IRS error).
- Employers (quarterly returns): Twelve consecutive quarterly returns of the same type filed on time before the current quarter, with the same penalty test (none assessed, or any assessed later removed for reasonable cause or IRS error).
- Business taxpayers (partnership, corporate and employment-tax returns), in addition: the IRS did not waive the failure-to-deposit penalty four or more times in the prior three years (or 12 consecutive quarters), and no failure-to-deposit penalty was charged for EFTPS avoidance.
- All filers: the current return must be an eligible original return; AEP does not require the current year's tax to be paid first — you still owe the tax and interest.
Estimated-tax underpayment penalties (Form 2210 / §6654) do not disqualify you — the clean-history test is the same as the old FTA test.
4. Which returns are covered
Covered
- Form 1040 — individual income tax
- Form 1065 — partnership returns
- Form 1120 — C-corp income tax
- Form 940 — annual FUTA
- Forms 941/943/944/945 — payroll & withholding
- Form CT-1 — railroad retirement
Generally not covered
- Information returns (1099, W-2, 1095)
- Event-driven filings (estate, gift, excise)
- Form 5471 / 5472 international info returns
- Form 990 series (tax-exempt orgs)
5. What AEP does not cover
Even with full AEP relief, you still owe:
- The tax itself. AEP is a penalty program, not a tax forgiveness program.
- Interest under §6621. Interest on the underlying unpaid tax runs from the original due date until paid, at the federal short-term rate + 3%, compounded daily.
- Accuracy-related and fraud penalties. IRC §6662 (20% substantial-understatement) and §6663 (fraud) sit outside AEP's scope.
- Information-return penalties (late 1099s, incorrect W-2s, missed 1095 filings).
- Event-driven filing penalties such as late estate-tax or excise-tax filings.
6. Timeline
Summer 2026 — Phase-in begins
IRS begins updating processing systems. FTA remains the standing remedy; taxpayers who receive notices should still request it manually.
Through year-end 2026 — Transition window
TY2025 individual returns and 2026 quarterly returns start being processed under AEP logic. Notices may still be mailed in error during the switchover — respond as under the old FTA process.
January 1, 2027 — Full replacement
AEP fully replaces First-Time Abatement for returns with original due dates on or after this date. Relief is applied automatically; the IRS mails a confirmation notice.
Related tools & guides
Guide
Got a CP14 Notice?
Step-by-step response for the transition period — including the FTA phone-call script.
ReadCalculator
IRS Penalty & Interest
Size the FTF, FTP, and interest before you call — so you know what AEP should erase.
OpenPrevent the notice
Estimated Tax Safe Harbor Guide
The 110% / 100% prior-year rule that keeps you in AEP-eligible territory year after year.
ReadGuide
IRS Payment Plans & Setup Fees
An installment agreement stops enforced collection and halves the failure-to-pay rate; AEP itself does not require one.
ReadFrequently asked questions
- Do I still need to request penalty abatement?
- Not for eligible original returns from tax year 2025 onward — AEP applies automatically at processing and the IRS mails a notice confirming it. But during the summer-2026 phase-in, some qualifying taxpayers may still get a CP14 or similar penalty notice for a TY2025 return; if you do, call the number on the notice or file Form 843 to request First-Time Penalty Abatement. Don't pay a penalty your history should erase.
- Does AEP cover interest?
- No. AEP suppresses the failure-to-file, failure-to-pay, and failure-to-deposit penalties. It does not touch the tax itself or the underlying §6621 interest on that tax. Interest on any penalty that AEP removes comes off automatically because there is no penalty left to accrue interest against.
- What if I wasn't clean for the 3 prior years?
- You lose the automatic relief, but reasonable-cause relief still exists. If a specific event (serious illness, natural disaster, records destroyed, death in the family) caused the late file or late pay, you can request abatement under IRC §6651(a)(1) with a written explanation and supporting documentation on Form 843.
- Which penalties are covered?
- Three: failure-to-file (IRC §6651(a)(1)), failure-to-pay (§6651(a)(2)/(3)), and failure-to-deposit for business payroll returns (§6656). Accuracy-related penalties, fraud penalties, and information-return penalties are NOT covered.
- When does this start?
- The phase-in begins in summer 2026 as the IRS updates processing systems. AEP fully replaces First-Time Abatement for returns with ORIGINAL due dates on or after January 1, 2027. In practice, the first returns covered are TY2025 individual and entity returns and the four quarterly employment-tax returns filed during 2026.
Sources & References
Primary references used for this content
IRS Simplifies Penalty Relief (July 2026 announcement)
Announcement of Automatic Exemption from Penalty (AEP) replacing First-Time Abatement
View on irs.gov
IRS simplifies penalty relief, introduces automatic process for eligible taxpayers
Cutover date: AEP replaces First-Time Abate for returns with original due dates on or after January 1, 2027
View on irs.gov
National Taxpayer Advocate — Penalty Relief Reform
Years of advocacy for automatic FTA that shaped the AEP design
View on taxpayeradvocate.irs.gov
IRS to automate first-time penalty relief
Practitioner coverage of the AEP rollout and timeline
View on journalofaccountancy.com
First-Time Penalty Abatement (current remedy through transition)
The existing FTA program taxpayers should still use for TY2025 notices
View on irs.gov
Failure to file / failure to pay penalties
Statutory basis for the penalties AEP suppresses
View on law.cornell.edu
Failure to deposit employment taxes
Deposit penalty covered by AEP for business filers
View on law.cornell.edu
✓7 primary sources; links re-checked on a weekly rotation by the source watcher
Disclaimer: This calculator provides estimates for educational purposes only. Not tax, legal, or financial advice. Results may vary based on your specific circumstances. Consult a qualified CPA or tax professional for personalized guidance.