Is IRS Automatic Penalty Relief Replacing First Time Abate?

IRS automatic penalty relief has a name now: the Automatic Exemption from Penalty, or AEP. The IRS says that First Time Abate (FTA) "is transitioning to a new relief called Automatic Exemption from Penalty (AEP), starting Summer 2026." Under FTA, the IRS assessed the late filing or late payment penalty first, and the client had to ask for it to be removed. Under AEP, a client with three clean years (or 12 clean quarters for quarterly filers) is never assessed the penalty at all, and nobody has to ask.

That is already live for your clients. AEP applies to 2025 tax year returns and to 2026 quarterly returns, so a late 2025 Form 1040 or Form 1065 filed this fall, and the 2026 Forms 941, are in its scope now. The change affects how much a client pays, which notices you will see, and which clients still need you to make a call or file Form 843.

What Is IRS Automatic Penalty Relief Under AEP?

AEP is administrative penalty relief that the IRS applies on its own when an eligible original return finishes processing. The IRS page on administrative penalty relief puts the core rule this way: if you file or pay late in the current year but have a clean record for the three prior years (or 12 consecutive quarters for quarterly filers), "you won't be assessed a penalty."

The timing is specific: "AEP is applied when your original return completes processing." When that happens and IRS records show the history, the page says the IRS "won't assess penalties for failure to file, failure to pay, or failure to make a deposit." The page ties those to IRC 6651(a)(1) for failure to file (IRC 6698(a)(1) for partnership returns, IRC 6699(a)(1) for S corporation returns), IRC 6651(a)(2) and (a)(3) for failure to pay, and IRC 6656 for failure to deposit.

The client does nothing. The page says: "You don't need to contact the IRS or respond to the notice."

FTA still exists, but its role shrinks. The page's comparison table says FTA "Applies to eligible 2025 tax year and 2026 quarterly returns (not considered for AEP), plus all prior years/periods." In plain terms, FTA is now the route for older periods and for returns AEP does not consider. AEP covers the 2025 tax year, the 2026 quarters, and every period after them.

Which Returns Does AEP Cover, and Which Does It Leave Out?

The return list is short. The page says "The following return series are eligible for AEP consideration":

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

Relief starts with "2025 tax year returns, and subsequent" and "2026 quarterly returns, and subsequent."

Now read what the list leaves out. It names Form 1120, but it does not name Form 1120-S. It also does not name Form 1041 or Form 990. The page does not explain the omissions, and I would not call them a rule that S corporations or trusts are excluded. The list does not settle the 1120-S question. The page calls these "return series," and its list of penalties eligible for relief under FTA or AEP includes the S corporation late filing penalty under IRC 6699(a)(1). I would not tell an S corporation client either way. If a late 1120-S draws a penalty notice instead of an AEP letter, request FTA.

Who Qualifies for Automatic Relief?

The test is the same compliance history that FTA used. The page calls it "a timely compliance history," and lists the conditions word for word:

The same return type, as the original return, was timely filed for the prior three years (or 12 consecutive quarters), and

Either no penalty (except the estimated tax penalty) was assessed or a penalty was assessed, but later abated for reasonable cause or IRS error

Two details in that text do real work. As I read "The same return type," the history runs per return series, so a client's Form 941 record and Form 1040 record are tested separately. And the estimated tax penalty does not spoil the history. A client who paid an underpayment penalty on quarterly estimates can still qualify.

Business taxpayers have two more conditions:

The IRS did not waive the failure to deposit penalty four or more times during the prior three years (or 12 consecutive quarters), and

The failure to deposit penalty was not charged for Electronic Federal Tax Payment System (EFTPS) avoidance.

Read the second one narrowly. It reaches a deposit penalty charged for EFTPS avoidance, not every deposit penalty.

Some items are out entirely. The page says you cannot receive this relief for "Returns filed once or infrequently (i.e., event-based filing requirements)," for "The Daily Delinquency Penalty (DDP)," or for "Information reporting dependent on another filing." The page does not list which forms it treats as event-based, so check before you promise a client anything.

Why Does AEP Change the Amount the Client Pays?

AEP stops the failure-to-pay penalty from building at all, which FTA did not do. The comparison table on the IRS page is direct. Under FTA, the failure-to-pay penalty "May continue to accrue until the tax is fully paid." Under AEP, it "Does not accrue and is not assessed on unpaid tax."

Think about a client who files late and pays over several months. Under FTA, the penalty was assessed first and could keep growing until the tax was paid. Under AEP, there is no penalty to grow.

AEP does not erase the balance. The page says: "You are liable for payment of any unpaid tax, interest, or other penalty assessment not subject to AEP relief." Tax and interest still run. Any penalty outside the three that the page lists stays payable.

Interest on penalties has its own rule. The page says the IRS assesses interest on penalties, and then: "we'll automatically reduce or remove the interest related to a penalty if any of your penalties are reduced or removed." So when FTA removes an assessed penalty, the interest tied to it comes off without a separate request.

What Should Practitioners Do With AEP Letters and Penalty Notices?

Start with the mail. A client who got AEP will not see a penalty notice. The page says "you'll receive a letter explaining that even though you filed late, paid the tax late, or didn't make the deposit timely, the applicable penalties were not assessed due to your history of timely compliance." Tell clients to send you that letter. It is your record of which period used the relief.

Then work through the cases:

1. A penalty notice on an eligible return. If the return is on the AEP list and the client had the history, the penalty may have been assessed in error. The page says: "If you receive a notice showing an assessed penalty but believe you should have qualified for this relief, contact us." Pull the account transcript first to confirm the three prior years were filed on time.
2. A return the list does not name, or a period before AEP. Request FTA. The page says: "Though taxpayers must contact the IRS to request this relief, you don't need to specify FTA as the relief sought or provide supporting documents in your request for relief." Call the number on the notice, or send a written statement or Form 843, Claim for Refund and Request for Abatement.
3. A client without the history. The page says: "If you don't qualify for the relief, you may request penalty relief based on reasonable cause." Build that request on the client's own facts. The page says the IRS will notify you of its decision.
4. A balance already in collection. A penalty question and a collection deadline are separate problems. If the notice is a collection notice, check whether a collection due process clock is running before you work on abatement.

One more point for engagement letters. The page describes no way to decline AEP or to ask for reasonable cause relief in its place. I would not tell a client that relief can be held back for a worse year.

Does Relief Repeat if a Client Files Late Two Years in a Row?

On my reading of the history test, no. The test asks whether the same return type "was timely filed for the prior three years." A return filed late in year one is not timely filed, so it should break the three-year history when the IRS tests the return for year two, even if AEP kept every penalty for year one from being assessed.

The page does not say how an AEP year is counted later, so treat that as my reading, not an IRS statement. The case I am least sure of is a return filed on time but paid late. The formal test asks only about timely filing and assessed penalties, so it may be met. But the page's AEP summary describes the history as "timely filed returns and paid tax due for the three prior years," which points the other way. The page does not reconcile the two.

The practical advice holds either way. A client who used AEP this year should not count on it next year. Get the next return in on time.

Frequently Asked Questions

Do I need to file Form 843 to get AEP? No. AEP is applied when the original return completes processing, and the page says the taxpayer does not need to contact the IRS. Form 843 is one of the ways to request FTA.

Does AEP cover a late Form 1120-S? The page does not settle it. The AEP list names Form 1120 but not Form 1120-S, yet the page lists the S corporation late filing penalty as eligible for relief under FTA or AEP. If a penalty notice arrives, request FTA.

Does an estimated tax penalty disqualify a client from AEP? No. The history test asks whether any penalty was assessed "except the estimated tax penalty," so that penalty does not break the history.

When I work a penalty notice, I want the IRS page, the statute and the client's facts side by side before I advise. I built Tax Orator to give me that in one cited answer.