Understanding IRS pandemic failure-to-pay penalty relief

Oversight findings released in January 2026 by the Treasury Inspector General for Tax Administration (TIGTA) provide useful insight into how the IRS applies large-scale relief and how practitioners can better advise clients facing penalties.

Background on the penalty issue

During the COVID-19 pandemic, the IRS suspended certain automated collection notices beginning in February 2022. The goal was to ease pressure on taxpayers and allow the agency to focus on backlog reduction and operational challenges. While notices were paused, however, the failure-to-pay penalty continued to accrue on unpaid balances. Many taxpayers were unaware that penalties were still building because reminder notices were not being sent.

This created a disconnect. Taxpayers reasonably believed enforcement activity was paused, yet penalties continued to increase behind the scenes. As balances grew, the IRS recognized the need for administrative relief to address the unintended burden placed on millions of affected taxpayers.

One-time failure-to-pay penalty waiver

In December 2023, the IRS announced a one-time waiver of the failure-to-pay penalty for eligible taxpayers, applicable to penalties accrued while automated collection notices were suspended. This action was intended to correct the imbalance created during the pandemic and restore fairness in the collection process.

The IRS identified approximately five million taxpayers who qualified for the waiver. According to oversight findings, the IRS successfully removed penalties for more than 99% of eligible accounts. This high success rate demonstrates the IRS’s ability to apply broad relief when appropriate systems and criteria are in place.

Impact on taxpayer behavior

Penalty relief did not eliminate underlying tax liabilities. Instead, it reduced balances by removing penalties that accrued during the notice suspension period. 

Oversight findings show that the relief prompted meaningful taxpayer action; reducing penalties often makes balances feel manageable and encourages compliance rather than avoidance. About 3.6 million taxpayers addressed their remaining balances by paying, entering payment arrangements or otherwise resolving their accounts.

Communication and follow-up

Not all eligible taxpayers resolved their balances immediately. For those who did not take action, the IRS sent letters explaining that penalty relief had been applied and normal collection operations would resume beginning in April 2024. These notices served as a reset point, signaling that enforcement activity was restarting after an extended pause.

Lessons for tax professionals

This penalty relief initiative offers several practical takeaways for tax pros:

First, administrative relief can occur even when penalties are technically authorized under the law. The IRS has discretion to waive penalties when circumstances warrant, particularly when its own actions contribute to taxpayer confusion or hardship.

Second, penalty relief does not resolve the underlying tax; clients still need a plan to address balances due. Taxpayers may mistakenly believe relief means enforcement is over. Relief should be viewed as an opportunity to resolve issues, not as a permanent solution.

Third, communication timing matters. Clients may not notice penalty relief unless they review their account transcripts or receive updated notices. Proactively checking transcripts can help tax pros identify relief applied to client accounts and advise next steps.

Using penalty relief in client conversations

When working with clients who owe back taxes, discussing general penalty relief options can reduce anxiety and build trust. Even when broad relief programs such as the pandemic penalty waiver are no longer available, other options, such as reasonable cause relief or first-time abatement, may apply.

This recent initiative also reinforces the value of monitoring IRS announcements and oversight reports. Relief programs may be announced after penalties have already accrued, and retroactive adjustments are possible. Staying informed allows you to revisit client situations that may have seemed settled.

Bottom line

The IRS’s one-time failure-to-pay penalty waiver corrected a pandemic-era issue that affected millions of taxpayers. Oversight findings confirm the relief was largely successful and encouraged many taxpayers to resolve their outstanding balances. 

For tax pros, the episode underscores the importance of monitoring penalty accruals, reviewing transcripts and communicating clearly with clients about relief and next steps.