Automatic Penalty Relief IRS: What EA Candidates Know

The IRS has announced a new Automatic Exemption from Penalty (AEP) that will automatically give certain compliant taxpayers relief from common penalties. For EA candidates, the key point is simple: AEP is replacing First Time Abate for eligible returns, but reasonable cause relief still exists separately.

What is the IRS Automatic Exemption from Penalty?

AEP is a new administrative penalty-relief process the IRS says begins this summer (per IR-2026-83). Instead of requiring eligible taxpayers to ask for relief, the IRS will apply it automatically during processing.

For eligible original returns, AEP can prevent assessment of these penalties:

• Failure to file
• Failure to pay
• Failure to deposit

To qualify, the taxpayer generally must have a history of timely filing and paying in the prior three years, or 12 consecutive quarters for quarterly returns.

That makes AEP similar in purpose to the old First Time Abate (FTA) relief, but easier administratively because the taxpayer does not need to make a separate request when the IRS can determine eligibility automatically.

When does AEP replace First Time Abate?

This is the part EA candidates should pay close attention to.

According to the IRS, AEP applies to eligible original returns beginning with tax year 2025 and 2026 quarterly returns, plus future periods. But the transition is gradual.

During the phase-in period starting in summer 2026:

• Some taxpayers may still receive penalty notices even if they appear eligible.
• Those taxpayers may still need to contact the IRS and request First Time Abate.
• AEP will replace FTA for eligible returns with original due dates on or after January 1, 2027.

So for exam thinking and client communication, do not assume FTA disappears overnight. During the transition, both concepts matter.

What is not covered by AEP?

AEP is not universal.

The IRS says some returns are generally not eligible, including:

• Information returns
• Returns filed only because of specific transactions or infrequent events
• Examples such as Form 706 and Form 709

Also, AEP does not erase everything. Taxpayers still owe:

• Any tax due
• Interest due
• Penalties that are not eligible for AEP

And if a taxpayer does not qualify for AEP, they may still request reasonable cause relief. That remains an important separate path for penalty removal and is highly testable on the EA exam.

Practical takeaway for EA exam prep

For the EA exam, remember this framework: automatic relief for eligible compliant taxpayers, FTA during transition, and reasonable cause when automatic relief does not apply. That distinction can help on Part 1, Part 2, and especially Part 3 questions involving IRS procedures and taxpayer representation.

If you want to practice these kinds of penalty and procedure topics, Enrolled Angel at enrld.com includes EA-style questions across all three parts so you can reinforce the rules in context.