First Time Abate Is Becoming Automatic

Q: What is Automatic Exemption from Penalty (AEP)?

AEP is the IRS relief that replaces First Time Abate. Per the IRS penalty-relief page, 'if you file or pay late in the current year but have timely filed returns and paid tax due for the three prior years (or 12 consecutive quarters for quarterly filers), you won't be assessed a penalty.' The eligibility test is the same one FTA used, but the delivery is different: AEP is applied automatically when your original return completes processing, and the IRS sends a letter explaining that the penalty was not assessed. You do not call, you do not file Form 843, and you do not respond to the notice. AEP begins summer 2026 and applies to 2025 tax year returns and subsequent, plus 2026 quarterly returns and subsequent.

Q: Does AEP cover the estimated tax penalty freelancers usually get?

No, and this is the most important limitation for a self-employed filer. The penalties eligible for relief are failure to file (IRC 6651(a)(1), plus 6698(a)(1) for partnerships and 6699(a)(1) for S corporations), failure to pay (IRC 6651(a)(2) and (a)(3)), and failure to deposit (IRC 6656). The estimated tax penalty under IRC 6654 — the one a freelancer who underpaid quarterly taxes actually receives — is not on that list. AEP does not touch it. If your only penalty is the underpayment penalty, AEP changes nothing for you, and Form 2210 remains the route to reduce or eliminate it.

Q: Does an estimated tax penalty in a prior year disqualify me?

No. The IRS states the clean-history test as: the same return type was timely filed for the prior three years, and 'either no penalty (except the estimated tax penalty) was assessed or a penalty was assessed, but later abated for reasonable cause or IRS error.' The estimated tax penalty is carved out of the disqualifying set by name. That is an unusually good outcome for freelancers, because the underpayment penalty is the one most of them have collected at some point. You can have been hit with it in all three prior years and still qualify.

Q: Does AEP stop the interest on what I owe?

No. AEP suppresses penalties, not the balance and not interest. The IRS is explicit that under AEP 'you are liable for payment of any unpaid tax, interest, or other penalty assessment not subject to AEP relief.' Interest runs on unpaid tax from the original due date regardless of relief, and interest that accrued on an abated penalty generally follows that penalty. Practically: relief can erase a four-figure penalty and still leave you writing a check for tax plus interest, so it is not a reason to file or pay late on purpose.

Q: Do I still have to call the IRS the way I did for First Time Abate?

Not once AEP applies to your return. FTA required you to contact the IRS — by phone using the number on your notice, or by written statement or Form 843 — even though you never had to name FTA or send documents, because the IRS reviewed your account itself. AEP removes that step entirely: relief is applied at processing and you receive a letter after the fact. FTA has not vanished, though. The IRS says FTA still applies to eligible 2025 tax year and 2026 quarterly returns that were not considered for AEP, plus all prior years and periods, so an older year still runs through the request-based process.

Q: What if I qualify but the IRS assesses the penalty anyway?

Contact the IRS — that is the instruction on the relief page for a notice showing an assessed penalty you believe should have qualified. Automatic relief depends on IRS records showing a timely compliance history, and records can be incomplete: a return the IRS shows as late when you filed on time, or a prior-year penalty that was abated but never cleared from your account, will both suppress relief that you were entitled to. Check the three prior years of the same return type before you call, so you can name the year in dispute rather than asking the IRS to go looking.

Q: Which returns are eligible for AEP?

The IRS lists Forms 1040, 1065 and 1120; Forms 940, 941, 943, 944 and 945; and Form CT-1. A sole proprietor's Schedule C rides on the Form 1040, so it is covered by the 1040 entry rather than separately. Relief is not available for returns filed once or infrequently (event-based filing requirements), the Daily Delinquency Penalty, or information reporting that depends on another filing — which is why a late Form 1099-NEC to a contractor you hired is outside this relief even though your own 1040 is inside it.

Published: September 8, 2026 · Reading time: 8 min

TL;DR: The IRS is replacing First Time Abate (FTA) with Automatic Exemption from Penalty (AEP), starting summer 2026. The qualifying test does not change — the same return type filed on time for the prior three years, with a clean penalty record. What changes is that you no longer have to ask. AEP is applied when your original return completes processing, and a letter arrives afterwards telling you the penalty was not assessed. The relief covers failure to file (§6651(a)(1)), failure to pay (§6651(a)(2) and (a)(3)) and failure to deposit (§6656). It does not cover the estimated tax penalty under §6654 — the one most freelancers actually get. The consolation is real, though: a prior §6654 penalty is explicitly excluded from the record that would otherwise disqualify you.

Every article about IRS penalty relief, including three on this site, ends with the same instruction: call the IRS and ask for First Time Abate.

As of summer 2026 that instruction is being retired.

What Actually Changed

The IRS penalty-relief page now opens with the transition in a single sentence:

The most common administrative penalty waiver provided by the IRS, First Time Abate (FTA), applies to taxpayers with three years of timely compliance history. However, FTA is transitioning to a new relief called Automatic Exemption from Penalty (AEP), starting Summer 2026.

And here is how the IRS describes the new relief:

AEP begins summer 2026. Under AEP, if you file or pay late in the current year but have timely filed returns and paid tax due for the three prior years (or 12 consecutive quarters for quarterly filers), you won't be assessed a penalty.

Read those two together and the substance of the change is narrow but genuinely useful: the eligibility test is unchanged and the delivery mechanism is inverted. FTA was relief you had to request. AEP is relief you receive.

	First Time Abate (FTA)	Automatic Exemption from Penalty (AEP)
How relief is granted	Not automatic	Automatic
Action required by you	Contact the IRS to request it	None
When it happens	After you ask, on review of your account	When your original return completes processing
How you find out	The IRS responds to your request	A letter explaining the penalty was not assessed
Applies to	Eligible 2025 tax year and 2026 quarterly returns not considered for AEP, plus all prior years/periods	2025 tax year and 2026 quarterly returns, and all future tax years/quarters

FTA is not gone. The two overlap deliberately at the boundary: AEP picks up 2025 tax year returns and 2026 quarterly returns going forward, while FTA remains the route for anything older and for eligible returns AEP did not consider. If you are cleaning up a 2022 return this autumn, you are still in FTA-land and you still have to ask.

The Test You Have to Pass

The IRS states it as a timely compliance history, which means all of the following:

The same return type, as the original return, was timely filed for the prior three years (or 12 consecutive quarters for quarterly filers), and
Either no penalty (except the estimated tax penalty) was assessed, or a penalty was assessed but later abated for reasonable cause or IRS error

For a sole proprietor that reads as: three consecutive on-time Forms 1040. Your Schedule C does not have its own compliance history — it rides on the 1040.

The parenthesis that matters more than the rule

Read that second bullet again, slowly: no penalty (except the estimated tax penalty) was assessed.

The single most common penalty a self-employed person collects is the §6654 underpayment of estimated tax penalty. Almost everyone who has freelanced through a good year and under-guessed their quarterlies has one on their record. If that penalty counted against the clean-history test, most freelancers would be permanently locked out of this relief.

It does not count. It is carved out by name.

You can have been assessed an estimated tax penalty in all three prior years and still qualify for AEP. That is the most reader-relevant sentence on the IRS's page and it is buried in a parenthesis.

What AEP Covers — and the Gap Underneath It

The eligible penalties, "regardless of amount":

Penalty	Code section	Covered?
Failure to file — tax returns	§6651(a)(1)	✅
Failure to file — partnership returns	§6698(a)(1)	✅
Failure to file — S corporation returns	§6699(a)(1)	✅
Failure to pay — tax shown on the return	§6651(a)(2)	✅
Failure to pay — tax not shown, after notice and demand	§6651(a)(3)	✅
Failure to deposit	§6656	✅
Underpayment of estimated tax	§6654	❌ Not covered
Accuracy-related penalty	§6662	❌ Not covered
Daily Delinquency Penalty	—	❌ Not eligible
Information reporting dependent on another filing	—	❌ Not eligible

The gap is the point. AEP is generous about the penalties for being late and silent about the penalty for having underpaid across the year. For a freelancer those are different failures with different causes, and the one AEP ignores is the one quarterly estimates exist to prevent.

If your notice shows a §6654 penalty, this relief does nothing for it. Your route there is Form 2210 and the underpayment penalty rules, and your prevention is hitting a safe harbor.

Worked Example: $9,000 Owed, Filed Four Months Late

Priya is a freelance UX designer. She had a strong 2026, did not file an extension, and files her 2026 return in August 2027 — four months past the April deadline — owing a $9,000 balance. Her 2023, 2024 and 2025 Forms 1040 were all filed on time. She was assessed an estimated tax penalty in 2024, which she paid.

Failure to pay — §6651(a)(2). 0.5% of the unpaid tax per month or fraction: $9,000 × 0.5% × 4 = $180.00

Failure to file — §6651(a)(1). 5% per month, but §6651(c)(1) requires that "With respect to any return, the amount of the addition under paragraph (1) of subsection (a) shall be reduced by the amount of the addition under paragraph (2) of subsection (a) for any month (or fraction thereof) to which an addition to tax applies under both paragraphs (1) and (2)." Both apply in all four months, so the effective rate is 4.5% per month: $9,000 × 5% × 4 = $1,800.00, less the $180.00 above = $1,620.00

Item	Amount
Failure to file, §6651(a)(1), net of the §6651(c)(1) reduction	$1,620.00
Failure to pay, §6651(a)(2)	$180.00
Penalties before relief	$1,800.00
Penalties after AEP	$0.00

The 2024 estimated tax penalty does not disqualify her, because §6654 is the carve-out in the clean-history test. Her three prior 1040s were timely, so AEP applies at processing and she never picks up the phone.

What she still owes: the $9,000 of tax, plus interest on it from the April due date. The IRS is explicit that under AEP "you are liable for payment of any unpaid tax, interest, or other penalty assessment not subject to AEP relief." And if the same return also carries a §6654 penalty for 2026, that survives too.

So the honest summary of Priya's outcome is: $1,800 of the bill disappears, and the rest of it does not. Filing four months late is still expensive — it is just no longer expensive in this particular way.

What This Changes About How You Should Behave

Very little, and that is worth saying plainly rather than selling the relief as a strategy.

It is not a free late filing. Interest runs, the §6654 penalty is untouched, and using AEP once means the next three years have to be clean before it is available again.
It is not a reason to skip an extension. Form 4868 is free, takes minutes, and removes the failure-to-file penalty outright — the larger of the two penalties in Priya's table by a factor of nine. Relying on AEP instead of extending is trading a certainty for a conditional.
It does reduce the cost of a bad year. Illness, a records disaster, a client who paid in January for December work — the situations that make a return late are rarely chosen. AEP means one of them no longer requires a phone call to fix.
It does not replace reasonable cause. If you do not have three clean years, reasonable-cause relief is still available on its own terms, and it is the route when a penalty is larger or the history is messier.

Check your own three years before you need this. The relief is automatic but it is not psychic — it runs on IRS records of your filing history, and a year the IRS believes was late will suppress it silently.

Where This Sits Next to the Other Penalty Routes

Situation	Route
Late-filed or late-paid 2025+ return, three clean years	AEP — automatic, nothing to do
Late-filed older return, three clean years	FTA — still request-based
Underpaid quarterly estimates	Form 2210 — AEP does not apply
Understated tax on an accurate-looking return	Accuracy-related penalty, §6662 — not eligible
Missed the S corp election deadline	Rev. Proc. 2013-30 relief — a different regime entirely
Can't pay what you filed	Payment plan options
Several years unfiled	Filing late and catching up

Frequently Asked Questions

What is Automatic Exemption from Penalty (AEP)?

The IRS relief replacing First Time Abate. Same three-year clean-history test, but applied automatically when your original return completes processing, with a letter afterwards. No call, no Form 843, no response required. It begins summer 2026 for 2025 tax year returns and 2026 quarterly returns and onward.

Does AEP cover the estimated tax penalty freelancers usually get?

No. Eligible penalties are failure to file (§6651(a)(1), §6698(a)(1), §6699(a)(1)), failure to pay (§6651(a)(2), (a)(3)) and failure to deposit (§6656). The §6654 underpayment penalty is not among them.

Does an estimated tax penalty in a prior year disqualify me?

No — the clean-history test excludes it by name: "no penalty (except the estimated tax penalty) was assessed." You can have collected one in all three prior years and still qualify.

Does AEP stop the interest on what I owe?

No. Under AEP "you are liable for payment of any unpaid tax, interest, or other penalty assessment not subject to AEP relief." Interest on unpaid tax runs from the original due date either way.

Do I still have to call the IRS the way I did for First Time Abate?

Not for returns AEP covers. FTA required a request — phone, written statement, or Form 843 — even though you never had to name FTA or send documents. For older years and eligible returns AEP did not consider, FTA and its request step remain.

What if I qualify but the IRS assesses the penalty anyway?

Contact the IRS. Automatic relief runs on IRS records of your compliance history, so a year those records show as late — correctly or not — will block it. Check your three prior years first so you can name the disputed one.

Which returns are eligible for AEP?

Forms 1040, 1065, 1120; Forms 940, 941, 943, 944, 945; and Form CT-1. A Schedule C is covered through the Form 1040. Event-based filings, the Daily Delinquency Penalty, and information reporting dependent on another filing are excluded.

Authoritative References

IRS — Penalty relief due to First Time Abate or other administrative waiver: the AEP transition, the eligible penalties, and the compliance-history test
Cornell LII / U.S. Code — 26 U.S.C. §6651, including the subsection (c)(1) reduction when both additions apply
Cornell LII / U.S. Code — 26 U.S.C. §6654: the estimated tax penalty AEP does not reach
IRS — Penalty relief for the reasonable-cause route when the three-year history is not clean
IRS — Form 843, Claim for Refund and Request for Abatement

The Relief Is Automatic. Being Ready to File Isn't.

AEP removes the penalty for filing late once. It does not remove the reason most freelance returns go late, which is a shoebox of receipts and a year of un-reconstructed mileage sitting between you and a finished Schedule C. CentSense captures expenses as they happen — photograph a receipt, get the vendor, date and amount read out and mapped to a Schedule C line — so April is a review rather than an excavation. Free tier includes 10 AI scans per month; Solo is $5/month for unlimited scanning and automatic mileage logging.

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This guide is general education for U.S. freelancers and independent contractors filing for the 2026 tax year. It is not personalized tax advice. AEP's rollout is described by the IRS as beginning summer 2026; confirm how it applied to your specific return with a CPA or EA before relying on it.

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