On July 8, 2026, the IRS announced a new “Automatic Exemption from Penalty” (“AEP”) program (expected to begin in the summer of 2026) that will provide automatic penalty relief to taxpayers who have filed their returns and paid any tax due on time during the immediately prior three years (or 12 consecutive quarters for quarterly filers). The AEP applies to certain failure-to-file, failure-to-pay and failure-to-deposit penalties (“Eligible Penalties”). The IRS lists the following return series as AEP eligible: (i) income tax Forms 1040, 1065, 1120, (ii) payroll tax Forms 940, 941, 943, 944 and 945, and (iii) the employer’s railroad retirement tax return Form CT-1. However, information returns and returns that are filed in response to specific transactions or infrequent events [such as Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return or Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return] generally are not eligible for relief under the AEP.

Under the AEP, the IRS will automatically apply relief from Eligible Penalties, and the IRS will issue a notice confirming that penalty relief was granted; a formal request by the taxpayer is not necessary under AEP, as was the case under its predecessor, the First-Time Abatement (“FTA”) program. The IRS indicated that AEP is intended to make penalty relief simpler and less burdensome by automatically applying relief that otherwise would have required a taxpayer to request relief under the FTA process, effectively benefiting more taxpayers who were unaware of the FTA process and failed to request penalty relief. Taxpayers who do not qualify under the AEP program may still be eligible for penalty relief, if they can establish reasonable cause.

Importantly, AEP only relieves Eligible Penalties; taxpayers remain responsible for any tax due, accrued interest, and penalties not eligible for relief. The IRS will phase out FTA during 2026, with AEP fully replacing it for eligible returns due on or after January 1, 2027. The FTA remains available during this transition period for eligible (i) 2024 tax year returns, (ii) 2025 quarterly returns, (iii) 2025 tax year returns processed before AEP starts, and (iv) 2026 quarterly returns processed before AEP starts.

For example, Bob timely filed his 2023, 2024 and 2025 Federal income returns (and made timely payments), but did not file his 2026 and 2027 returns until 2032. The taxpayer then timely filed his 2028, 2029 and 2030 returns (and made timely payments), but did not file the 2031 return until 2032. AEP applies to the late-filed 2026 return because Bob had a timely filing-and-payment history for the immediately prior three years (2023–2025). AEP would not apply to the late-filed 2027 return, because the return for 2026 was not timely filed. AEP will apply to the late-filed 2031 return because the returns for the immediately prior three years (2028–2030) were timely filed.