By: Emma Hill, Pinion Financial Institutions Advisor

The IRS recently announced a new systemic penalty relief program called Automatic Exemption from Penalty (AEP), which will begin rolling out in summer 2026. The new process is designed to simplify penalty relief for eligible taxpayers by automatically applying relief that previously required a formal request under the IRS First-Time Abatement (FTA) program.

Why This Matters

If your institution is managing multiple tax forms, filing deadlines, and payment obligations, AEP could simplify one piece of the compliance process: penalty relief.

Key AEP Eligibility Requirements

Under the new program, automatic relief may be available for certain late filing and late payment penalties when the taxpayer:

  • Has a three-year history of timely filing and payment compliance, or a 12-quarter history for quarterly filers.
  • Is filing returns covered by the AEP program.
  • Receives penalties associated with tax years and filing periods covered by the new rules.

Returns and Forms Covered

Not every return qualifies. The AEP program applies to select income, employment, and excise-related filings, including:

Tax Returns

  • Form 1040
  • Form 1065
  • Form 1120

Employment and Excise-Related Forms

  • Form 940
  • Form 941
  • Form 943
  • Form 944
  • Form 945
  • Form CT-1

Timing and Transition Considerations

The IRS will apply AEP beginning with:

  • 2025 tax year returns
  • 2026 quarterly returns

The existing First-Time Abatement program is being phased out and will be fully replaced by AEP for eligible returns with original due dates on or after January 1, 2027.

During the transition period, taxpayers may still receive IRS penalty notices that would otherwise qualify for AEP relief. If an expected penalty waiver is not applied automatically, institutions should review the notice promptly and contact the IRS when appropriate.

Important Reminder

While AEP may eliminate eligible penalties, it does not remove the underlying tax liability or related interest charges. Taxpayers should continue to prioritize timely filing and payment procedures to minimize additional costs. If a taxpayer does not qualify for AEP, penalty relief based on reasonable cause may still be available under existing IRS rules.

Steps You Can Take to Prepare

  • Review compliance histories to understand AEP eligibility.
  • Monitor IRS penalty notices during the transition period.
  • Maintain documentation supporting timely filing and payment practices.
  • Evaluate reasonable-cause relief options when AEP is unavailable.
  • Coordinate with tax advisors and internal tax leadership teams regarding the impact of the new process.

If your institution has questions about penalty notices or how AEP may affect your compliance process, reach out to a Pinion advisor.