Under a program the IRS scheduled to begin in summer 2026, failure-to-file, failure-to-pay and failure-to-deposit penalties are waived automatically for taxpayers with three prior years of timely compliance. The agency’s fact sheet FS-2026-12 calls the program Automatic Exemption from Penalty, or AEP, and says no application, form or separate request is needed. It replaces First Time Abate, which required a phone call or a written request, for original returns due on or after January 1, 2027.
What the automatic exemption covers
The fact sheet says AEP exists “to recognize taxpayers with a history of timely compliance” and prevents certain penalties from being assessed during original return processing. The IRS’s administrative penalty relief page says AEP begins in summer 2026 and applies to 2025 tax year returns and later, and to 2026 quarterly returns and later.
The difference from First Time Abate is when the penalty exists. Under First Time Abate, the penalty is assessed first and removed later, and a failure-to-pay penalty can keep accruing until the tax is fully paid. Under AEP, the penalty is not assessed, and the failure-to-pay penalty does not accrue on the unpaid tax. The IRS says it will send a notice when AEP is applied, explaining that the penalty was not assessed because of the taxpayer’s prior compliance.
What counts as three clean years
The relief page spells out the test. The same type of return must have been timely filed for the prior three years, or for 12 consecutive quarters for quarterly filers. No penalty other than the estimated tax penalty can have been assessed in that period, unless an assessed penalty was later removed for reasonable cause or IRS error.
That answers the question that comes up for anyone who files late: will a penalty be charged, or does the exemption cover it? A taxpayer with three prior years of timely filing and payment on the same type of return is the person AEP was built for, and the IRS says the penalty should not be assessed. A taxpayer who missed a deadline or owed a penalty in that lookback is outside the automatic test and has to turn to the request-based routes.
The IRS says it sends a notice when the exemption applies, so a penalty letter that shows up despite three clean years is the one worth reading closely. The IRS Refund Recovery Kit includes a notice decoder for reading IRS letters line by line.
Decode a penalty notice with the IRS Refund Recovery Kit’s notice decoder →
What the exemption does not reach
Businesses face one more condition. The IRS must not have waived the failure-to-deposit penalty four or more times in the lookback period, and that penalty cannot have come from avoiding the Electronic Federal Tax Payment System.
The eligible return series are Forms 1040, 1065, 1120, 940, 941, 943, 944, 945 and CT-1.
The fact sheet lists penalties that AEP “does not apply to”: daily delinquency penalties, accuracy-related penalties and information return penalties. Event-based or infrequent returns are also ineligible, according to the relief page, as is information reporting that depends on another filing.
The exemption works at the point of original return processing. It does not reach back to earlier years, and the fact sheet says First Time Abate remains available during the transition, with a request, for eligible 2024 tax year returns, 2025 quarterly returns and some 2025 and 2026 returns processed before AEP starts.
What a penalty costs without it
The size of what is avoided shows on the IRS’s failure-to-file penalty page. The penalty is 5% of the tax due for each month or partial month a return is late, and it builds to a maximum of 25%. The page’s minimum-penalty table lists $525.00 for returns due after December 31, 2025.
October 15 is the extension deadline for a 2025 return, and the IRS’s extension page says the extension is only for filing, with any tax owed due by the April filing date. A taxpayer who files by that date on extension avoids the late-filing penalty, but tax owed was still due in April.
Reading a penalty notice that should not exist
The IRS’s penalty relief page is the free official route. It lists first-time penalty abate and administrative waiver, reasonable cause and statutory exception, and says some requests can be handled by phone while others go in writing on Form 843.
A taxpayer who gets a penalty notice despite three clean years can pull the returns for the prior three years, confirm each was filed on time and paid, and set them next to the notice. A failure-to-file, failure-to-pay or failure-to-deposit penalty on a 2025 return or later is the kind the exemption was written to prevent. The relief page adds that when a notice contains wrong information, a penalty may not apply once the issue is resolved.
Interest follows the penalty: the IRS says related interest is reduced or removed automatically when a penalty is reduced or removed, a line that appears on the same relief page.
A penalty notice after three clean years
A notice that charges a failure-to-file penalty to a taxpayer who was on time for three prior years can sit unread until interest builds. The IRS Refund Recovery Kit pairs a notice decoder with a refund status tracker spreadsheet, so the penalty line, the tax period and the response date get logged in one place.
Log the penalty notice in the Refund Recovery Kit’s status tracker →
This article was produced with AI assistance and edited for accuracy against the sources linked above.
