What AEP is
The IRS announced the Automatic Exemption from Penalty on July 8, 2026 (IR-2026-83). It is the successor to First Time Abate, the administrative waiver that forgave a first failure-to-file, failure-to-pay or failure-to-deposit penalty for taxpayers with three clean years. The difference is the order of events. Under First Time Abate the penalty was assessed and the taxpayer had to call or write to have it removed. Under AEP the check happens when the original return finishes processing, and if the history is clean the penalty is never assessed: no notice to answer, no Form 843, no phone call.
The IRS describes it as a transition: First Time Abate is phased out during summer 2026, and AEP replaces it for eligible returns with original due dates on or after January 1, 2027.
Sources: IRS, Administrative penalty relief (reviewed July 14, 2026); draft Instructions for Form 945 (2026).
Returns, years and penalties covered
| Item | Covered by AEP |
|---|---|
| Return types | Forms 1040, 1065 and 1120; Forms 940, 941, 943, 944 and 945; Form CT-1 |
| Periods | Tax year 2025 returns and later; quarterly returns from 2026 |
| Failure to file | IRC 6651(a)(1); partnership returns, IRC 6698(a)(1); S corporation returns, IRC 6699(a)(1) |
| Failure to pay | IRC 6651(a)(2) (tax shown on the return) and 6651(a)(3) (tax assessed later and not paid by the notice date) |
| Failure to deposit | IRC 6656, for deposits not made in the right amount, on time or in the required manner, except as noted below |
| Not covered | Returns filed once or infrequently (event-based filings such as Forms 706 and 709), the daily delinquency penalty, information reporting, and the failure-to-deposit penalty for not depositing by EFT |
Relief applies to any amount of penalty. It does not reach the tax itself, the interest on the tax, or any other penalty: the IRS says the taxpayer stays liable for "any unpaid tax, interest, or other penalty assessment not subject to AEP relief." Where a penalty is removed, the interest charged on that penalty goes with it.
The compliance history test
The test is the same three-year look-back that First Time Abate used, now applied automatically:
- Same return type, filed on time, for the prior three years, or the prior 12 consecutive quarters for a quarterly return. For a Form 945 for 2026, that means the 2023, 2024 and 2025 Forms 945.
- No penalty in those years, other than the estimated tax penalty, or any penalty that was assessed has since been abated for reasonable cause or IRS error.
- For business returns, two more conditions. The failure-to-deposit penalty must not have been waived four or more times in the prior three years (or 12 quarters), and it must not have been charged for avoiding EFTPS.
A payer that has never filed Form 945 before. The test looks at the same return type. A payer filing its first Form 945, because it started backup withholding this year, has no prior Forms 945 to look back on. The IRS pages do not say how a first-year filer is treated; until they do, assume reasonable cause is the fallback and keep the deposit records that would support it.
What it means for Form 945
Form 945 is where backup withholding is reported and reconciled, and its penalties are the ones AEP is built for: a 945 filed after January 31, a balance paid with the return instead of deposited, a semiweekly deposit made a few days late. From tax year 2025 on, a payer with three clean years will not see those penalties assessed at all. The draft 2026 Instructions for Form 945 describe the program in the same terms and add the one exception that matters most to depositors: a failure-to-deposit penalty for failing to make deposits by electronic funds transfer is not covered.
Three things do not change. The withheld tax still has to be deposited and is still owed if it was not; interest on late tax still runs; and the averaged deposit penalty that follows a missing or wrong Form 945-A is fixed by correcting the schedule, which should come first in any case. A payer that does not qualify asks for relief the old way, on reasonable cause.
The same draft instructions add two payment changes: refunds will be issued by direct deposit when valid account details are given, and balances due should be paid electronically under Executive Order 14247. See where is my Form 945 refund.
Why 1099 penalties are still excluded
The penalty on a Notice 972CG is under IRC 6721 (the return filed with the IRS) and 6722 (the payee statement). Neither is a failure-to-file, failure-to-pay or failure-to-deposit penalty, and the IRS announcement excludes information returns from AEP by name. The draft Form 945 instructions say the same: information returns "such as Form W-2 and Forms 1099" do not qualify. This is the same line First Time Abate drew, explained in why First Time Abate will not fix a 1099 penalty.
So a single failure can still produce two penalties with two relief rules. Backup withholding that was not deposited is a Form 945 penalty, and AEP may remove it automatically. The 1099s with incorrect TINs behind that withholding are a 972CG penalty, and the only defense is reasonable cause: the solicitation record.
AEP and First Time Abate compared
| First Time Abate | Automatic Exemption from Penalty | |
|---|---|---|
| Periods | All periods before 2025 (2026 for quarterly returns), and eligible 2025 or 2026-quarterly returns that AEP does not consider | Tax year 2025 and 2026 quarterly returns, and every later period |
| How it is granted | On request, by phone or in writing (Form 843 or a letter) | Automatically, when the original return is processed |
| Penalty | Assessed first, then removed | Never assessed |
| Failure to pay | Can keep accruing until the tax is paid | Does not accrue and is not assessed |
| History test | Three years (or 12 quarters) of timely filing with no penalties other than the estimated tax penalty; for businesses, no more than three deposit-penalty waivers and no EFTPS-avoidance penalty | |
For older Form 945 periods nothing changes: ask for First Time Abate if the history supports it. A request does not need to name it; the IRS checks for it before weighing reasonable cause.
How you find out
When AEP is applied, the IRS sends a letter saying that a penalty would have applied for filing, paying or depositing late and was not assessed because of the account's history. Nothing needs to be returned. If a notice shows an assessed penalty on a 2025 or later return that should have qualified, the IRS says to contact it, using the number on the notice.
Keep the letter with the return. AEP uses up the clean history the same way First Time Abate did: a late filing this year still breaks the next three years' look-back, even though no penalty was charged.
Questions people ask
Do we have to ask for AEP?
No. It is applied automatically when the original return finishes processing, and the IRS sends a letter if it was used.
Does AEP cover our Notice 972CG?
No. Information returns are excluded, and IRC 6721 and 6722 are not among the penalties it covers. The 972CG response is still a reasonable-cause statement built on your solicitation records.
Is First Time Abate gone?
Not for older periods. It remains available, on request, for periods before AEP and for eligible 2025 or 2026-quarterly returns that AEP did not consider. AEP replaces it for eligible returns originally due on or after January 1, 2027.
Does AEP cover a late deposit of backup withholding?
Yes, if the three-year history is clean and the deposit was made by EFT. A deposit penalty for not using EFT is excluded.
Does it remove interest?
Interest on a penalty goes when the penalty goes. Interest on late or unpaid tax is still owed.