IRS Automatic Exemption from Penalty, or AEP, has two transition milestones that should not be confused. AEP begins in summer 2026 for eligible 2025 annual returns and 2026 quarterly returns. Separately, the IRS July 2026 fact sheet says first-time abatement, or FTA, is replaced by AEP for original returns due January 1, 2027 or later.
Match the return to the transition
Record the return type, period, original due date and processing history. AEP is designed to prevent eligible penalties during original return processing. FTA involves requesting relief after assessment, and remains available for certain returns during the transition. These procedures should not be interchanged based only on the year in a notice.
| Question | Record to check | Why it matters |
|---|---|---|
| Which return and period? | Filed return and notice | Annual and quarterly eligibility periods differ |
| When was the original return processed? | Account history and correspondence | Transition treatment can depend on processing |
| What penalty was assessed? | Penalty description and account records | Not every penalty is covered |
| What is the prior compliance history? | Prior returns, payments and penalty records | Eligibility requires the applicable timely-compliance history |
Check eligibility, not just a label
IRS administrative guidance describes eligible return series and a timely-compliance history over three prior years, or 12 consecutive quarters for quarterly filers, with additional business requirements. AEP generally concerns specified failure-to-file, failure-to-pay and failure-to-deposit penalties. It is not a universal waiver of accuracy penalties or international information-return penalties.
If IRS correspondence shows a penalty you believe should have received AEP treatment, compare the actual return and account record with the current agency guidance. Preserve the notice and identify the specific discrepancy rather than submitting a generic demand that every penalty be removed.
Use California’s rule separately
California’s one-time penalty abatement is a separate FTB program for qualifying individual taxpayers. It is not the federal three-year-history rule transplanted into state law. The FTB resource describes qualifying penalties, tax years and filing/payment requirements, and explains the once-in-a-lifetime limitation.
Maintain separate federal and state rows in a relief worksheet. Record the agency, penalty, period, authority, eligibility evidence and request status. A federal relief decision does not establish state eligibility, and a California request does not resolve an IRS notice.
Organize the account before requesting relief
Gather complete notices, filed-return evidence, payment records and prior relief decisions. Confirm whether a balance includes tax, interest and more than one penalty. Removing one eligible penalty does not necessarily remove the remaining amounts.
If a prior penalty was abated, preserve the explanation rather than treating all prior abatements as identical. An account summary alone may not show why an adjustment occurred. That distinction can affect the review of the compliance history.
Avoid a blanket waiver strategy
When administrative relief does not apply, reasonable-cause or other procedures may need separate analysis. Different penalties have different standards. Counsel should evaluate the facts and applicable authority rather than promising that a first request or a particular form guarantees removal.
See our IRS penalty abatement and California FTB representation pages. A focused consultation starts with the actual notices and account history.
Primary sources
IRS administrative penalty relief; IRS July 2026 AEP fact sheet; FTB one-time penalty abatement. Source checked October 1, 2026; verify current guidance for your return and notice.
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Sam Landis is a Beverly Hills IRS tax attorney specializing in IRS collection defense, audit representation, and international tax compliance for foreign nationals and US expats.