The IRS has announced that taxpayers with a clean three-year record will stop being charged late-filing and late-payment penalties in the first place, with no request needed. The new Automatic Exemption from Penalty, or AEP, is set to replace First Time Abate, the long-running relief that required a taxpayer to ask for the penalty to be removed after it was assessed. The change matters in money terms because penalties for filing or paying late can add up quickly, and until now the removal depended on a phone call or letter.
The agency announced the program on July 8, 2026 in release IR-2026-83. IRS Chief Executive Officer Frank J. Bisignano said in that release that AEP “reflects the IRS’ commitment to making the payment of taxes owed simpler and more consistent.”
Three clean years, or 12 clean quarters
Eligibility turns on a compliance record rather than an application. Under the IRS description, a taxpayer needs a history of timely filing and paying the tax due in the three prior years. Filers of quarterly returns, such as employers, qualify on 12 consecutive on-time quarters instead.
The IRS says AEP applies to eligible original returns beginning with tax year 2025 and to 2026 quarterly returns, as well as future tax periods. The agency’s administrative penalty relief page states the rule in plain terms: if a taxpayer files or pays late in the current year but filed on time and paid the tax due in the three prior years, “you won’t be assessed a penalty.”
Three penalties are covered. According to the IRS, when a taxpayer qualifies, penalties are not assessed during processing for failure to file, failure to pay and failure to deposit. The failure-to-deposit penalty is the one that reaches employers who fall behind on payroll tax deposits, which is why the 12-quarter test exists.
The exclusions are narrow but specific. The IRS says information returns and returns filed only in response to specific transactions or infrequent events, such as Form 706 (the estate tax return) or Form 709 (the gift tax return), are outside the exemption.
What replaces what, and when
First Time Abate has a similar clean-record test, but it works differently. The IRS page says a taxpayer must show the same return type was timely filed for the prior three years, and that either no penalty was assessed (apart from the estimated tax penalty) or any penalty was later abated for reasonable cause or IRS error. The taxpayer asks for relief, and the IRS removes a penalty already on the account.
The transition has a practical catch. During the changeover, the IRS says, some qualifying taxpayers may still receive penalty notices for eligible tax year 2025 returns and 2026 quarterly returns. Its instruction for them is direct: taxpayers who believe they qualify may contact the IRS to request First Time Abate.
The question for a taxpayer holding such a notice is what it actually says. The related job is reading the IRS letter in hand: The IRS Refund Recovery Kit contains a notice decoder for working out what a notice is saying, though it does not grant penalty relief and the IRS alone decides that.
Decode the IRS penalty notice in hand →
AEP flips that sequence. The IRS says it “will replace First Time Abate for eligible returns with original due dates on or after Jan. 1, 2027.” The release describes the rollout as phased: the agency began phasing out First Time Abate and moving to AEP in the summer of 2026, and the replacement is announced policy with a fixed date for the final switch, not an overnight cutover.
A penalty notice during the changeover
That transition language is where the announcement meets the mailbox. A taxpayer with three clean years who still receives a penalty notice for a 2025 return has to work out two things from the letter: which penalty was assessed, and whether the account history fits the clean-record test. The notice, rather than the news release, is the document that controls what happens next.
The IRS states that no action is required to receive AEP. If a taxpayer is eligible, the agency says it “will apply AEP and issue a notice confirming that the relief was granted.” That means a second kind of letter will also arrive, one confirming relief rather than demanding payment, and the two are easy to confuse at a glance.
Taxpayers who do not meet the three-year or 12-quarter test are not shut out. The IRS says those who do not qualify for AEP may still request penalty relief based on reasonable cause, the separate route that has always required an explanation of why the return or payment was late.
Who gains from the switch, and who does not
Under First Time Abate, relief depended on a taxpayer knowing it existed and asking. Under AEP, the clean-record test is applied by the IRS itself, so a filer who never heard of the old process is treated the same as one who called every year. The IRS frames the change as a simplification, and the mechanics support that: no request, no waiting for an abatement after the penalty posts.
The limits are also built in. The record is measured over the three prior years, so a filer with one late return in that window falls outside the automatic route and returns to the reasonable-cause request. Quarterly filers face a longer run, 12 straight on-time quarters. And because AEP replaces First Time Abate only for original due dates on or after January 1, 2027, returns due before that date remain in the transition described above.
The release does not publish a count of taxpayers expected to qualify or a dollar estimate of penalties that will no longer be assessed, and no per-taxpayer figure is stated. What the IRS does give is the rule, the covered penalties, the exclusions and the dates.
Checking a penalty notice against the AEP rules before the 2027 switch
The first step for a taxpayer who receives a late-filing or late-payment penalty is to identify the tax year and the form on the notice, then compare it with the IRS’s administrative penalty relief page, which lists the First Time Abate and AEP criteria side by side. That page is the free official route, and the IRS phone number on the notice is the way to request First Time Abate while the transition runs.
Before calling, a taxpayer needs the filing and payment dates for the prior three years of the same return type, plus any penalty history on those years. For quarterly returns, the 12 most recent quarters’ deposit and filing dates are the relevant record. If a past penalty was removed for reasonable cause or IRS error, the First Time Abate test counts it differently from one that simply stayed on the account, so that detail belongs in the file.
The date that matters is January 1, 2027, the original due date from which the IRS says AEP fully takes the place of First Time Abate. Returns with earlier original due dates can still produce a penalty notice for a taxpayer who believes the clean-record rule applies, and the IRS has said such a taxpayer may ask for relief.
For taxpayers sorting a penalty letter from a relief confirmation, The IRS Refund Recovery Kit includes a notice decoder and a refund status tracker spreadsheet for keeping notice dates and responses in one place. It is a private product, not an IRS service, and it does not decide whether a penalty is waived.
Click here to get The IRS Refund Recovery Kit’s notice decoder →
This article was produced with AI assistance and reviewed by The Financial Wire’s editorial team.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
