IRS Replaces First Time Abate With Automatic Exemption From Penalty
If you have filed and paid on time for the last three years and then slip once, the IRS will now waive the penalty on its own, with no phone call and no form to file. The new program is called Automatic Exemption from Penalty (AEP), announced by the IRS in IR-2026-83 on July 8, 2026. AEP replaces First Time Abate (FTA), the relief program that has handled these situations for years. It phases in during the summer of 2026, covers eligible original returns starting with tax year 2025 and 2026 quarterly returns, and fully replaces FTA for returns with original due dates on or after January 1, 2027.
Here is what AEP does, how it differs from FTA, what the transition period looks like, and why the penalties that hurt Americans abroad most still sit outside both programs.
What Automatic Exemption From Penalty Does
AEP is a systemic administrative relief program. Instead of assessing a penalty and waiting for you to request its removal, the IRS reviews your compliance history during return processing and simply does not assess the penalty in the first place.
Per the IRS fact sheet FS-2026-12, AEP may apply to three penalty types:
- Failure to file
- Failure to pay
- Failure to deposit
To qualify, you need three prior years of timely filing and payment, or 12 consecutive quarters for quarterly returns. There is no application, no form, and no separate request. When AEP applies, the IRS sends you a notice explaining that the penalty was not assessed because of your compliance history.
One thing AEP does not do is erase what you owe. Tax and interest remain due, along with any penalties incurred outside the program.
How AEP and First Time Abate Compare
| First Time Abate (FTA) | Automatic Exemption from Penalty (AEP) | |
|---|---|---|
| How is the relief triggered | You contact the IRS and request it | Applied by the IRS during return processing |
| Timing | Penalty is assessed, then abated | Penalty is never assessed |
| Compliance history required | Clean the three prior years | Three prior years, or 12 consecutive quarters |
| Penalties covered | Failure to file, failure to pay, failure to deposit | Failure to file, failure to pay, failure to deposit |
| Returns covered | Tax year 2024 and eligible 2025 and 2026 periods processed before AEP starts | Eligible original returns from tax year 2025 and 2026, quarterly returns forward |
| Availability | Ends for original returns due on or after January 1, 2027 | Ongoing |
The practical difference is who does the work. Under FTA, relief depended on you knowing the program existed and asking for it. Under AEP, eligibility is checked for you.
The Transition Runs Through the End of 2026
The changeover is not a clean switch on a single date, creating a window during which the old rules still matter.
| Return or period | Which program applies | What you need to do |
|---|---|---|
| Tax year 2024 returns | FTA | Contact the IRS to request it |
| 2025 quarterly returns | FTA | Contact the IRS to request it |
| Tax year 2025 returns processed before AEP starts | FTA | Contact the IRS to request it |
| 2026 quarterly returns processed before AEP starts | FTA | Contact the IRS to request it |
| Original returns due on or after January 1, 2027 | AEP only | Nothing, relief is automatic |
The IRS has been explicit that during the transition, some taxpayers who would qualify may still receive a penalty notice for the eligible tax years 2025 and 2026 quarterly returns. If that happens and you believe you qualify, you can contact the IRS and request FTA. FTA is not applied automatically. If you receive a notice during this window and assume the system will fix it for you, the penalty stays.
The Rules Shift Again in January 2027
Which Penalties Sit Outside AEP
AEP is narrower than the headline suggests. The IRS lists these as outside the program:
| Penalty or return type | Covered by AEP? |
|---|---|
| Failure to file, pay, or deposit on eligible returns | Yes |
| Daily delinquency penalties | No |
| Accuracy-related penalties | No |
| Information return penalties | No |
| Event-triggered returns such as estate and gift tax returns | No |
Returns filed only in response to a specific transaction or an infrequent event, as well as information returns, are generally not eligible at all.
The Biggest Penalties for Americans Abroad Are Still Excluded
This is where the change matters least, and it is the part worth reading twice.
A first-time late penalty on your Form 1040 can now be waived without you lifting a finger, including if you miss the June 15 automatic extension for Americans living abroad. That is real relief, and it applies to a large share of expat filers. If you are unsure which deadline applies to you, our guide to U.S. filing deadlines for Americans abroad outlines all the dates.
But the relief does nothing for the penalties that cause expats the most damage. FBAR penalties are administered by FinCEN and fall entirely outside the IRS penalty system, so neither FTA nor AEP applies to them. International information return penalties are excluded as information returns or event-based filings.
| Form | What it reports | Covered by AEP? |
|---|---|---|
| FinCEN Form 114 | Foreign bank and financial accounts | No |
| Form 3520 | Foreign gifts and trusts | No |
| Form 5471 | Foreign corporations | No |
| Form 8865 | Foreign partnerships | No |
| Form 8938 | Specified foreign financial assets | No |
Penalties on those international information returns start at $10,000. If your real exposure is foreign account reporting or foreign entity reporting, AEP is not your path. The Streamlined Filing Compliance Procedures or the Delinquent FBAR Submission Procedures are.
What This Means for Americans Abroad
The good news is that one honest slip on your federal return is now much less likely to cost you money. If your three prior years are clean and you file or pay a few weeks late, the failure-to-file and failure-to-pay penalties should never appear on your account.
The catch is that “clean three prior years” is doing a lot of work in that sentence. Many Americans abroad discover their U.S. filing obligation late and have gaps in their record. A gap in the prior three years disqualifies you from AEP for the current year, which is one more reason catching up on late filings has value beyond the years it covers.
Consider a simple case. You live in Portugal, filed and paid on time for tax years 2022 through 2024, and filed your 2025 return in September 2026, owing $3,200. Under the old process, you would likely see a failure-to-file penalty of 5 percent per month and a failure-to-pay penalty accrue, then have to call the IRS to request abatement. Under AEP, those two penalties are not assessed during processing, and you receive a notice confirming why. You still owe $3,200 plus interest.
If you are:
- A late filer who missed a deadline for the first time, AEP is likely to cover you automatically, provided the three prior years are clean.
- An accidental American or dual citizen just discovering their filing obligation, AEP will not help this year because you have no prior compliance history. Streamlined Filing is the path.
- A digital nomad or self-employed expat filing a Schedule C, a first failure-to-pay penalty on self-employment income is covered, but the estimated tax penalty is not.
- A small business owner abroad with a first employment tax deposit miss, failure-to-deposit relief applies to eligible returns.
- As a retiree abroad with foreign accounts, your FBAR and Form 8938 exposure is unaffected by this change.
Steps to Take Now
- File your return even if you cannot pay in full. Failure-to-file penalties are far larger than failure-to-pay penalties, and AEP covers both only on returns you have filed.
- Check your compliance history for the three prior years before assuming relief applies. Gaps are the single most common disqualifier.
- Read any penalty notice you receive between now and January 2027 carefully. During the transition, a notice does not mean you are ineligible. It may mean FTA still governs your return, and you need to request it.
- Request FTA by phone or on Form 843 if you receive a notice on a tax year 2024 or 2025 return, or a 2025 or 2026 quarterly return, and your record is clean.
- Pull your IRS online account transcript after filing to confirm what was and was not assessed.
- Handle foreign reporting separately. If your exposure includes FBAR or international information returns, neither program applies, and you need a different route.
Sorting out which program governs your return, whether your three-year history is clean enough to qualify, and whether your real exposure is a federal penalty or a foreign reporting penalty is the kind of judgment call our team handles daily.
File With Confidence, Not Guesswork
Frequently Asked Questions
No. AEP is applied by the IRS during the processing of your original return when you meet the requirements. There is no form, no application, and no phone call. If it applies, the IRS sends you a notice explaining that the penalty was not assessed because of your three prior years of timely compliance.
No. FBAR penalties are administered by FinCEN and fall entirely outside the IRS penalty system. Penalties for Forms 3520, 5471, 8865, and 8938 are excluded because they are information returns or event-based filings. Those are the highest-dollar penalties Americans abroad face, and they require a separate relief path, typically Streamlined Filing or the delinquent international information return procedures.
Yes, for now. FTA remains available for eligible tax year 2024 returns, eligible 2025 quarterly returns, and eligible tax year 2025 and 2026 quarterly returns processed before AEP starts. You have to contact the IRS to request it, because it is not applied automatically. You can call the number on your notice or file Form 843, Claim for Refund and Request for Abatement. For original returns with due dates on or after January 1, 2027, FTA is no longer available.
You can still request penalty relief based on reasonable cause if circumstances outside your control caused the late filing or payment, such as serious illness, a natural disaster, or an inability to obtain records. The IRS reviews those requests and notifies you of the outcome. You can also appeal an adverse penalty relief decision.
No. AEP only prevents certain penalties from being assessed. You still owe the tax itself, interest on that tax, and any penalties the program does not cover.
This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional for guidance specific to your situation.
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