The IRS’s New Automatic Exemption from Penalty: What Expats Need to Know

If you’ve filed and paid your U.S. taxes on time for the past three years but slip up once, the IRS may now waive certain penalties automatically.

The change comes from a new program called Automatic Exemption from Penalty (AEP), announced in July 2026. Starting with eligible 2025 tax returns, the IRS will check whether you qualify when it processes your return. In most cases, you won’t need to apply or contact the IRS.

For Americans abroad, though, it’s important to know what the program does—and doesn’t—cover. AEP may protect you from certain penalties for filing or paying late, but it won’t cover penalties connected to FBARs or foreign information returns.

What is Automatic Exemption from Penalty?

Automatic Exemption from Penalty is a form of administrative penalty relief from the Internal Revenue Service. It is designed for taxpayers who have a strong record of filing their returns and paying their taxes on time but are late on an eligible return or payment.

Previously, these taxpayers generally had to ask the IRS to remove the penalty through First Time Abate (FTA). Under AEP, the IRS checks their records while processing the return. For eligible taxpayers, it simply doesn’t charge the qualifying late-filing or late-payment penalty.

AEP only removes the penalty. It doesn’t reduce the tax owed, and interest will continue to build on any unpaid tax.

The aim is to make IRS penalty relief easier to access. Taxpayers who don’t qualify for AEP may still be able to request reasonable cause relief if circumstances beyond their control led to the late filing or payment.

How is AEP different from First Time Abate?

Automatic Exemption from Penalty replaces an existing form of IRS penalty relief called First Time Abate (FTA). The main difference is that taxpayers no longer have to ask for the relief.

First Time Abate	Automatic Exemption from Penalty
An administrative waiver that generally had to be requested	Applied automatically during return processing
Penalty was assessed and later removed	Eligible penalty is not assessed
Taxpayer could request relief by contacting the IRS or filing Form 843	No application is normally required
Being phased out	Fully replaces First Time Abate for eligible returns due from January 1, 2027

Neither program depends on proving that an emergency or another unavoidable event caused the mistake. Instead, the IRS looks primarily at the taxpayer’s previous record of voluntary compliance.

The change also affects when the relief appears on the taxpayer’s account. Under FTA, the IRS made a penalty assessment first and removed it later. Under AEP, an eligible penalty is never charged.

Who qualifies for the AEP program?

AEP is available to taxpayers with a timely compliance history. For annual returns, the IRS looks at the previous three years. For quarterly returns, it looks at the previous 12 consecutive quarters.

To qualify, you must:

• Have filed the same type of return on time throughout that period
• Have paid any tax due on time
• Have no disqualifying penalties on your record
• Be filing an eligible original return, rather than an amended return
• File the current return within three years of its original due date

An extension doesn’t change that final deadline: the three years are measured from the return’s original due date.

A year without a return won’t necessarily disqualify you. If you genuinely weren’t required to file and the IRS’s records reflect that, the year can still count as compliant.

A previous penalty also won’t necessarily count against you if the IRS removed it because of reasonable cause or an IRS error. However, a penalty removed through AEP or First Time Abate does not leave you with a clean year for this purpose.

For joint returns, both spouses must meet the requirements. A clean history for only one spouse is not enough.

Which returns are eligible?

AEP applies to several commonly filed tax returns, including:

• Form 1040, the individual income tax return
• Form 1065, the partnership return
• Form 1120, the corporate income tax return
• Form 1120-S, the S-corporation income tax return
• Certain employment tax returns

Returns filed only when a particular event takes place generally aren’t eligible. This includes Form 706, the estate tax return.

For Americans abroad, the crucial distinction is between a tax return and an information return. Your Form 1040 may qualify for AEP, but that doesn’t mean the forms used to report your foreign accounts, assets or businesses are covered too. Forms such as 8938, 5471 and 3520 are information returns, so their penalties are excluded. FBAR penalties are also excluded because FBARs are filed separately with the Financial Crimes Enforcement Network rather than the IRS.

In practice, this means AEP could protect you from a late-filing penalty on your Form 1040 while leaving you exposed to a separate penalty for a missing foreign reporting form.

Which penalties does Automatic Penalty Relief cover?

For eligible individual taxpayers, AEP covers two penalties:

• Failure to file: Charged when you don’t submit your tax return by the deadline
• Failure to pay: Charged when you don’t pay the tax you owe by the due date

For eligible businesses, it can also cover the failure-to-deposit penalty. This applies when a business doesn’t deposit certain taxes, such as employment taxes, correctly or on time. These payments are generally made through the Electronic Federal Tax Payment System (EFTPS).

AEP prevents an eligible penalty from being charged. It doesn’t remove the original obligation: you must still file the return, pay the tax or make the required deposit. Businesses also won’t qualify for relief from a failure-to-deposit penalty charged for avoiding EFTPS.

What AEP does not cover for Americans abroad

AEP only covers certain penalties for filing and paying tax late. It does not provide automatic relief for mistakes involving foreign financial reporting.

AEP does not cover:

• FBAR penalties
• Form 8938 penalties
• Form 5471 or Form 5472 penalties
• Form 3520 or Form 3520-A penalties
• Estimated tax penalties
• Accuracy-related penalties
• Tax owed
• Interest on unpaid tax

For many Americans abroad, the greatest penalty risk comes from failing to report a foreign account, asset, business or trust—not from filing Form 1040 late. Those reporting penalties fall outside this administrative waiver and can still apply even when no U.S. tax is owed.

Tax and interest are treated separately too. AEP may prevent a failure-to-pay penalty, but you must still pay the underlying tax. Interest will continue to accrue until the balance is paid.

How could AEP help an American living abroad?

Say you live abroad and have filed and paid your U.S. taxes on time for the past three years. You then miss the June 15 deadline for your 2025 return and file late with tax to pay.

When the IRS processes your return, it checks your compliance history. If you meet the requirements for AEP, it won’t charge the failure-to-pay or failure-to-file penalties. You’ll still need to pay the tax itself, along with any interest that has accrued.

AEP won’t be as useful if you’re filing for the first time after missing several years. Without the required compliance history, you may need another way to catch up, such as the Streamlined Filing Compliance Procedures.

What does an IRS CP95 notice mean?

If you receive a CP95 notice, it means the IRS has applied AEP to your account. The notice confirms that an eligible penalty was not charged, so you don’t normally need to respond.

Your CP95 may arrive alongside another IRS notice showing tax or interest that you still owe. AEP doesn’t remove those amounts, so you’ll need to pay them by the deadline shown on that notice.

Check the notice number and read each letter carefully. Not every IRS notice confirms penalty relief, even if it arrives at the same time as a CP95.

What if the IRS charges a penalty during the AEP rollout?

The IRS began introducing AEP in summer 2026, starting with eligible tax year 2025 returns and 2026 quarterly returns. First Time Abate is being phased out and will be fully replaced for eligible returns due from January 1, 2027.

During this transition period, some taxpayers who would otherwise qualify for AEP may still receive a penalty notice because their return was processed before the new system became available. If this happens, don’t ignore the notice. You may still be able to request First Time Abate by calling the IRS or submitting Form 843.

If an IRS error prevented AEP from being applied during processing, the IRS may also be able to grant the relief manually.

What if AEP does not cover your situation?

AEP is only one form of IRS penalty relief. Depending on your circumstances, you may have other options:

• First Time Abate: This may still be available for eligible returns during the transition period.
• Reasonable cause relief: You may be able to request relief if circumstances beyond your control prevented you from filing or paying on time.
• Streamlined Filing Compliance Procedures: These can help eligible Americans abroad catch up on missed tax returns and foreign reporting.
• Delinquent international information return procedures: Separate procedures may apply if you filed your tax returns but missed certain foreign information forms.

The right option depends on your filing history, the notice you received and which returns or forms are outstanding. Choosing the wrong procedure can create more work—or leave penalties unresolved.

Bright!Tax specializes in helping Americans abroad get and stay compliant with their U.S. tax obligations. We can review your situation, explain your options and help you choose the appropriate next step.

Ready to get started? Talk to a Bright!Tax expert today.

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