You Paid Late but Never Got a Penalty Notice: The AEP Program Is Already Running and Here Is How It Works

The IRS quietly started doing something it has never done before: forgiving certain penalties before you even know you owe them. A new program called the Automatic Exemption from Penalty, or AEP, began rolling out in summer 2026, and if you have a solid three-year compliance history, it may have already prevented a penalty from landing on your account. If you are still seeing penalty notices, there are specific steps you need to take right now.

What the IRS Just Changed, and Why It Matters

For decades, the IRS offered something called First Time Abate (FTA), a form of penalty relief for taxpayers who filed or paid a little late but had otherwise been on time for the prior three years. The catch? You had to know it existed and ask for it yourself, either by calling the IRS or filing Form 843. Most people never did.

The IRS now estimates that more than 1.5 million taxpayers a year were eligible for that relief but never claimed it, simply because they did not know to ask. The AEP program is the agency’s answer to that gap.

On July 8, 2026, the IRS announced the Automatic Exemption from Penalty through news release IR-2026-83, with additional detail published in Fact Sheet FS-2026-12. The core change is straightforward: the IRS now checks your compliance history automatically when it processes your return. If you qualify, the penalty is never assessed at all. You do not need to call, fill out a form, or even know the program exists.

As IRS CEO Frank Bisignano put it in the July 8 release, eligible taxpayers “should not have to make a formal request for relief that is routinely granted.”

Who Qualifies for AEP

The eligibility rules for AEP closely mirror what FTA required. Here is the basic test:

• Annual filers (such as Form 1040): You must have filed on time and paid any tax due for each of the three prior tax years, with no failure-to-file, failure-to-pay, or failure-to-deposit penalties assessed during that period.
• Quarterly filers (such as Form 941 for payroll taxes): The lookback window is the 12 consecutive quarters before the return in question, with the same clean-history requirement.
• Extensions count: If you filed a valid extension and then filed your return within that extended period, that counts as timely.
• Estimated tax penalties do not disqualify you: A penalty under the estimated tax rules (IRC sections 6654 or 6655) alone does not break your compliance streak for AEP purposes.
• Previously abated penalties do not count against you: If a prior penalty was waived for reasonable cause or due to IRS error, it does not disqualify you.

AEP is designed for taxpayers who have an otherwise clean record and hit a one-time snag, not as a recurring safety net for taxpayers who fall behind repeatedly.

What Penalties AEP Covers (and What It Does Not)

AEP covers three of the most common IRS penalties:

• Failure to file (you submitted your return after the due date or extension)
• Failure to pay (you did not pay your full tax bill by the deadline)
• Failure to deposit (most relevant to employers who missed a payroll tax deposit)

Those three penalties cover the vast majority of situations where everyday taxpayers and small businesses get hit. But AEP does not cover everything. The following fall outside the program:

• Accuracy-related penalties
• Estimated tax penalties
• Information return penalties
• Penalties on returns tied to infrequent events, such as Form 706 (Estate Tax) and Form 709 (Gift Tax)

AEP also does not erase the tax you owe or stop interest from running. The underlying balance and any accrued interest remain your responsibility. The program only prevents qualifying penalties from being added on top.

The Transition Window: Why You Might Still Get a Penalty Notice This Year

AEP did not switch on for every return the moment it was announced. The IRS has been phasing the program in during the summer and fall of 2026, beginning with eligible 2025 annual returns and 2026 quarterly returns. If your return was processed before the AEP systems were fully live, the IRS may not have applied the relief automatically even if you qualified.

That means you could receive a penalty notice for a return period that should have been covered by AEP. This is a known issue during the transition, and the IRS has acknowledged it directly. If that happens to you, the right move is to contact the IRS and request First Time Abate under the existing procedures. FTA is still available during this period for exactly this reason.

The transition has a clear end date. For original returns with due dates on or after January 1, 2027, AEP fully replaces FTA. Starting with those returns, the automatic system takes over entirely, and FTA will no longer be the mechanism for this type of relief.

What to Expect If AEP Applies to You

If AEP applies to your return, you will not receive a penalty notice. Instead, the IRS will send you a confirmation notice explaining that a penalty was not assessed because of your compliance history. That notice is not a bill, and it does not require any response from you.

If you receive a penalty bill and believe you have a clean three-year history, do not assume the system will catch the error on its own. Read the notice carefully, note the penalty type and the tax period it covers, and take action. During the 2026 transition, you may need to call the IRS or work with a tax professional to request FTA manually for the affected period.

What to Do If You Do Not Qualify for AEP

Not everyone will meet the three-year compliance test. If you have unfiled returns, ongoing balances, or a history of late payments, AEP will not apply automatically to your account. That does not mean you are out of options.

The IRS still accepts penalty relief requests based on reasonable cause, meaning a genuine explanation for why you were late, such as a serious illness, a natural disaster, or circumstances beyond your control. This route requires a manual request and supporting documentation, but it remains available regardless of your compliance history.

If your situation involves unfiled returns, significant tax debt, or active collection action, the AEP program is just one piece of a much larger picture. Depending on your circumstances, you may be eligible for other IRS resolution options, such as an installment agreement, an Offer in Compromise, or currently-not-collectible status. Each of those programs has its own eligibility requirements and process, and what makes sense depends entirely on your individual situation.

At Clear Start Tax, we work with individuals and businesses who are behind on filing, dealing with IRS notices, or struggling to resolve tax debt. If you have received a penalty notice, are not sure whether AEP should have covered you, or simply do not know where to stand with the IRS, our team can review your situation and help you understand your options. Contact us today for a consultation.