On July 8, 2026, the IRS announced a genuinely good change: a new Automatic Exemption from Penalty (AEP) program that replaces the previous First Time Abate (FTA) system. Instead of requiring taxpayers or their professionals to proactively request penalty relief from the IRS, AEP identifies eligible taxpayers automatically and suppresses certain penalties before they're ever assessed.
The National Taxpayer Advocate has called AEP "a long-awaited taxpayer win," and the numbers back that up. In fiscal year 2025, roughly 220,000 taxpayers received FTA relief through the manual, request-it-yourself process. Taxpayer Advocate Service estimates that if AEP had been in place, more than 1.5 million taxpayers would have received relief automatically, about seven times as many. This means a lot of people were leaving money on the table simply because they didn't know what to ask, and that manual relief was more commonly granted to taxpayers who required or could afford a tax professional
If you've been assessed penalties but have otherwise timely filed and paid for the prior three years (or the prior 12 consecutive quarters, for quarterly filers), here’s what changes: f you've been assessed penalties but have otherwise timely filed and paid for the prior three years (or the prior 12 consecutive quarters, for quarterly filers), here’s what changes:
The rollout starts with 2025 tax year returns and 2026 quarterly returns, expands in 2027, and fully replaces FTA for original returns due on or after January 1, 2027
That's real progress. But two things are worth keeping in mind before you assume your penalty situation is automatically handled correctly.
AEP is a new, large-scale automated process, and eligibility hinges on specific criteria: a clean compliance history, the right penalty types, and returns that aren't excluded. New systems like this are prone to errors and edge cases, and Erin Collins, the National Taxpayer Advocate herself, flagged an unresolved wrinkle: AEP will be applied before the IRS considers whether a taxpayer qualifies for reasonable cause relief, which can cost taxpayers future relief they didn't know they were spending. If the U.S. taxpayer’s primary advocate is calling out gaps in the way the program is being implemented, it's worth assuming eligible taxpayers will sometimes be missed.
Pro Tip: With TaxNow, you can spot-check any penalty against your actual, documented filing and payment history, rather than trusting the IRS's automation got it right.
AEP only applies going forward. It does not automatically apply to penalties you already received before your return was processed under AEP. The National Taxpayer Advocate has specifically recommended the IRS apply AEP retroactively, but that appears unlikely to happen. If you paid a penalty in the past few years, there's a real chance you had a clean-enough history to qualify under the old FTA rules, or through reasonable cause relief.
Pro Tip: With TaxNow, you can quickly see prior-year penalties to evaluate whether a pre-AEP penalty is still worth contesting.
AEP is a meaningful upgrade to a process that used to put the burden entirely on taxpayers. But "automatic" doesn't mean "perfect," and it doesn't mean "retroactive." If you've gotten a penalty notice, new or old, it's still worth a second look. That's what TaxNow is here for.
