New IRS program automatically waives common late penalties for eligible taxpayers.

The IRS’s new Automatic Exemption from Penalty (AEP) program, announced July 8, 2026, may protect qualifying businesses from certain penalties after an isolated missed deadline—but it does not eliminate the tax or the interest owed.

Under the new process, the IRS will automatically review eligible taxpayers’ compliance histories when processing certain original returns. When a taxpayer qualifies, the covered penalty will not be assessed, and the IRS will send a notice confirming that relief was granted.

AEP is expected to apply to three common federal penalties:
1. Failure-to-file penalty

• This penalty can apply when an eligible tax return is filed after its due date, including any valid extension.
• For a business owner, this might involve a late partnership or corporate income tax return.

2. Failure-to-pay penalty

• This penalty can apply when tax shown on a return is not paid by the applicable deadline.
• AEP may prevent the failure-to-pay penalty from being assessed, but the business will still owe the unpaid tax and interest.

3. Failure-to-deposit penalty

• This penalty can apply when a business does not make a required federal tax deposit on time, in the correct amount or using the required method.
• For many businesses, this category is particularly important because it can include federal payroll tax deposits.

What AEP does not do:

• Extend a tax filing or payment deadline
• Cancel the underlying tax
• Eliminate interest charged on unpaid tax
• Cover every type of tax penalty
• Give businesses permission to file, pay, or make payroll deposits late

A typical qualifying taxpayer must have:

• Timely filed the same type of return during the applicable lookback period
• Timely paid the related tax obligations
• Avoided disqualifying penalties during that period
• Satisfied additional requirements that may apply to business tax deposits

What types of returns are covered?
For most privately held businesses the form returns to most likely benefit from AEP are:

• Form 1065 for partnerships
• Form 1120-S for S corporations
• Form 1120 for C corporations
• Forms 940, 941, 943, 944 and 945 for employment and withholding taxes
• Form CT-1

What is not covered?
AEP does not apply to every return or every penalty. The IRS notes that AEP does not cover:

• Information-return penalties, including many penalties involving Forms 1099
• Accuracy-related penalties arising from errors or understatements on a return
• Daily delinquency penalties
• Returns filed only after an unusual transaction or infrequent event
• Other penalties outside the AEP program
• Certain estate and gift tax returns, for example, generally do not qualify because they are associated with specific or infrequent events rather than recurring filing obligations.

Why might a qualifying business still receive a penalty notice?
AEP is being phased in during 2026, which creates an important transition issue.

The program begins with eligible 2025 tax-year returns and eligible 2026 quarterly returns, as well as future periods. However, some returns may have been processed before the IRS’s automatic system was operating. As a result, an otherwise eligible business could still receive a penalty notice during the transition. In that situation, the business may need to contact the IRS and request relief under the older First Time Abate process.

For eligible original returns with due dates on or after January 1, 2027, AEP is expected to replace First Time Abate. The practical message is simple: Do not ignore a penalty notice merely because AEP is supposed to be automatic.

Your Weiss Tax Advisor is ready to respond.
If you receive either an AEP confirmation or a federal penalty notice, immediately contact your Weiss Tax Advisor. After a careful review of your unique circumstances, you’ll know which relief rules apply and whether any further action is required.