Nearly Five Million Eligible Taxpayers Received Failure to Pay Penalty Relief, TIGTA (January 21, 2026)

Summary

A final audit report of the Treasury Inspector General for Tax Administration, Report Number 2026-400-001, dated January 21, 2026, titled Nearly Five Million Eligible Taxpayers Received Failure to Pay Penalty Relief Due to the Effects of the Pandemic. It evaluates the IRS administrative waiver of the Failure to Pay penalty for Tax Years 2020 and 2021, which the IRS announced in December 2023. The report finds that the IRS accurately identified and issued relief to more than 99 percent of eligible taxpayers, and that of the 4.9 million who received relief, 3.6 million have taken steps to resolve their balance. It recommends relief for taxpayers TIGTA identified as potentially eligible, who are potentially entitled to more than $463,000; the IRS agreed.

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“Nearly Five Million Eligible Taxpayers Received Failure to Pay Penalty Relief, TIGTA (January 21, 2026).” Original at www.oversight.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2026400001fr-68fd219ce0/, SHA-256 f385ad8d90a3e6bc32290d8a94facc61e42b2d128358d7e4963830f454be1a37.

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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

January 21, 2026

Report Number: 2026-400-001

TIGTACommunications@tigta.treas.gov | www.tigta.gov 1
HIGHLIGHTS: Nearly Five Million Eligible Taxpayers Received Failure
to Pay Penalty Relief Due to the Effects of the Pandemic
Final Audit Report issued on January 21, 2026 Report Number 2026-400-001

Why TIGTA Did This Audit What TIGTA Found
In February 2022, the IRS Our review of the nearly 5 million taxpayers determined that the IRS
temporarily suspended the mailing accurately identified and issued penalty relief to more than
of certain automated collection 99 percent of eligible taxpayers.
notices to help provide taxpayers
The IRS took several steps to administer the FTP penalty relief and
with relief due to the pandemic.
help taxpayers pay the remaining penalty. The IRS:
Although the notice mailings were
suspended, the Failure to Pay (FTP) • Published information about the FTP penalty relief and
penalty associated with the unpaid updated internal guidance to reflect the relief available to
taxes continued to accrue on tax taxpayers.
accounts. • Developed and implemented programming to identify
In December 2023, the IRS eligible taxpayers and provided appropriate relief.
announced that it would waive the • Created and issued Letters 38, Reminder, Notice Resumption,
FTP penalty for eligible taxpayers. that informed taxpayers that the IRS is resuming normal
We evaluated the accuracy of the operations.
administrative waiver for the FTP Of the 4.9 million eligible taxpayers who received penalty relief,
penalty for Tax Years 2020 and 3.6 million have taken steps to resolve their outstanding balance. The
2021 to determine whether only IRS issued letters from January 2024 through March 2024 that
eligible taxpayers received the notified the remaining 1.3 million taxpayers that normal collection
automatic FTP penalty relief. operations would resume beginning April 2024. The letter provided
Impact on Tax Administration the taxpayer with the amount owed, including penalties and interest,
and options for paying the outstanding balance.
The IRS identified about 4.9 million
individuals, businesses, trusts, However, we identified approximately 2,100 taxpayers who were
estates, and tax-exempt potentially eligible for the FTP penalty relief, but their tax accounts
organizations that were eligible for were not marked as eligible as of April 2024. Collectively, we estimate
approximately $1 billion in FTP these taxpayers are potentially entitled to more than $463,000 in FTP
penalty relief for Tax Years 2020 penalty relief.
and 2021. Since this is a one-time relief, which ended in March 2024, the IRS
The FTP penalty relief period does not need to make programming changes to identify other
began on the date the IRS issued potentially affected taxpayers. Therefore, we are not making a
an initial balance due notice to the recommendation related to programming changes. However, our
eligible taxpayer, or findings could be useful to the IRS if similar programs are
February 5, 2022, whichever was implemented in the future.
later. It ended on March 31, 2024. What TIGTA Recommended
Generally, the FTP penalty is We recommended that the IRS take the necessary steps to provide
0.5 percent of the unpaid taxes for FTP penalty relief to the 2,138 taxpayers we identified, including but
each month or part of a month not limited to abating FTP penalties.
and can reach a maximum of
25 percent. The IRS agreed with the recommendation and adjusted the
taxpayers’ accounts to provide them with the benefit of the penalty
relief. However, we did not evaluate the IRS’s corrective action.
Treasury Inspector General for tax administration seal.

U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024

January 21, 2026

MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE

FROM: Diana M. Tengesdal
Deputy Inspector General for Audit

SUBJECT: Final Audit Report – Nearly Five Million Eligible Taxpayers Received
Failure to Pay Penalty Relief Due to the Effects of the Pandemic
(Audit No.: 2024400032)

This report presents the results of our review to evaluate the accuracy of the administrative
waiver for the Failure to Pay penalty for Tax Years 2020 and 2021. This review was part of our
Fiscal Year 2025 Annual Audit Plan and addresses the major management and performance
challenge of Improving Taxpayer Service and Protecting Taxpayer Rights.
Management’s complete response to the draft report is included as Appendix V. If you have any
questions, please contact me or Deann L. Baiza, Acting Assistant Inspector General for Audit
(Returns Processing and Account Services).
Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

Table of Contents
Background ........................................................................................... Page 1

Results of Review ................................................................................. Page 2
Eligible Taxpayers Were Accurately Identified and Penalty Relief
Was Provided .........................................................................................................................Page 2
Recommendation 1: ........................................................................... Page 3

Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 4
Appendix II – Outcome Measure ...................................................................................Page 5
Appendix III – Eligible Returns Described in Notice 2024-7 ................................Page 6
Appendix IV – Letter 38, Reminder, Notice Resumption.......................................Page 7
Appendix V – Management’s Response to the Draft Report ..............................Page 12
Appendix VI – Glossary of Terms ...................................................................................Page 15
Appendix VII – Abbreviations ..........................................................................................Page 16
Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

Background
In February 2022, the Internal Revenue Service (IRS) temporarily suspended the mailing of
certain automated collection notices to help provide taxpayers relief due to the pandemic. These
automated collection notices are normally issued to taxpayers after an initial balance due notice.
The initial balance due notice informs the taxpayer of the amount of tax owed, including
penalties and interest, and how to pay the tax owed. Although the automated collection notices
were suspended, the Failure to Pay (FTP) penalty associated with the unpaid taxes continued to
accrue on tax accounts. Generally, the FTP penalty is 0.5 percent of the unpaid taxes for each
month or part of a month that the tax remains unpaid until the penalty reaches a maximum of
25 percent. For example:
Taxpayer A filed a Form 1040, U.S. Individual Income Tax Return, for Tax Year 2021, on
April 15, 2022, showing $10,000 in taxes owed. Assuming that Taxpayer A does not pay
any of the taxes owed, Taxpayer A will accrue a $50 FTP penalty per month ($10,000 x
0.5 percent) up to the maximum FTP penalty of $2,500 ($10,000 x 25 percent = $2,500).
In advance of resuming normal collection activities, the IRS announced in December 2023 that it
would waive the FTP penalty for eligible taxpayers. The FTP penalty relief period began on the
date the IRS issued an initial balance due notice to the eligible taxpayer, or February 5, 2022,
whichever was later, and ended on March 31, 2024. Figure 1 presents the eligibility requirements
for the FTP penalty relief.

Figure 1: Summary of the Eligibility Requirements for FTP Penalty Relief

Eligibility Requirements

Tax Year 1 2020 and 2021

Form 1040 series
Eligible Tax Form 1041 series
Returns 2 Form 1120 series
Form 990-T, Exempt Organization Business Income Tax Return

Assessed Tax Tax accounts must have an assessed tax below $100,000 as of December 7, 2023.

Collection Status An initial balance due notice sent to taxpayers on or before December 7, 2023.

Tax accounts that have:
Excluded from • Fraudulent Failure to File penalty or fraud penalty.
Relief • Offer in Compromise.
• FTP penalty assessments settled in a closing agreement or in a judicial proceeding.

Source: Summary of Notice 2024-7, Relief from Additions to Tax for Certain Taxpayer’s Failure to Timely
Pay Income Tax for Taxable Years 2020 and 2021, and the Internal Revenue Manual.

1
See glossary of terms in Appendix VI.
2
See all eligible tax returns in Appendix III.
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Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

The IRS identified taxpayers eligible for the FTP penalty relief, placed an indicator on the
taxpayer’s tax account, and automatically provided relief. Below is a hypothetical example of
how the IRS calculates the FTP penalty relief:
Taxpayer B filed a Form 1040 for Tax Year 2021, on April 15, 2022, showing $10,000 in
taxes owed. Taxpayer B did not pay and was issued the initial balance due notice on
June 15, 2022. The taxpayer fully paid the tax on October 15, 2022. The IRS would have
assessed Taxpayer B a $300 FTP penalty ($10,000 x (6 months x 0.5 percent) = $300) on
October 15, 2022.
However, due to the penalty relief, the IRS waived $200 from June 15, 2022, through
October 15, 2022, ($10,000 x (4 months x 0.5 percent) =$200) and Taxpayer B now has a
$100 FTP penalty.

Results of Review
The IRS accurately identified more than 99 percent of the nearly 5 million individuals, businesses,
trusts, estates, and tax-exempt organizations that were eligible for the FTP penalty relief for
Tax Years 2020 and 2021. The IRS took several steps to administer the FTP penalty relief and
help taxpayers pay the remaining penalty. The IRS:
• Published information about the FTP penalty relief and updated internal guidance to
reflect the relief available to taxpayers.
• Developed and implemented programming to identify eligible taxpayers and provided
appropriate relief.
• Created and issued Letters 38, Reminder, Notice Resumption, that informed taxpayers
that the IRS is resuming normal operations. 3
However, we identified approximately 2,100 taxpayers who were potentially eligible for the FTP
penalty relief, but their tax accounts were not marked as eligible as of April 2024. Collectively, we
estimate these taxpayers are potentially entitled to more than $463,000 in FTP penalty relief.

Eligible Taxpayers Were Accurately Identified and Penalty Relief Was Provided
We confirmed that the IRS accurately identified and issued penalty relief to more than
99 percent of eligible taxpayers (as of July 2024). The IRS deployed the FTP penalty relief
programming in phases to identify taxpayers eligible for the relief based upon their tax
accounts.
Of the 4.9 million eligible taxpayers who received penalty relief, 3.6 million have taken steps to
resolve their outstanding balance. The IRS issued letters from January 2024 through March 2024
that notified the remaining 1.3 million taxpayers that normal collection operations would
resume beginning in April 2024. The letter provided the taxpayer with the amount owed,
including penalties and interest, and options for paying the outstanding balance. The balance
reflected on the letter included FTP penalty relief.

3
See Appendix IV for an example of Letter 38.
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Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

IRS management is taking actions to grant relief to 2,138 potentially eligible taxpayers
We identified 2,138 taxpayers who were potentially eligible for the FTP penalty relief, but their
tax accounts were not marked as eligible (as of April 2024). IRS management agreed that these
tax accounts should be marked as eligible.
Management stated that 205 taxpayers that were originally scheduled to get relief did not get
the necessary indicator posted to their tax accounts. IRS management is working with the
Information Technology organization to understand why these accounts did not receive relief.
For the remaining 1,933 taxpayers, the IRS did not provide an explanation of why these accounts
did not receive the relief. IRS management agreed to abate FTP penalties for the applicable
relief period. However, there was no date provided for correcting these tax accounts. Since this
is a one-time relief, which ended in March 2024, the IRS does not need to make programming
changes to identify other potentially affected taxpayers. Therefore, we are not making a
recommendation related to programming changes. However, our findings could be useful to the
IRS if similar programs are implemented in the future.
The IRS estimates the total FTP penalty relief to be approximately $1 billion for 5 million tax
returns, or about $206 per tax return. Using the IRS’s estimate, these 2,248 tax accounts
associated with the 2,138 taxpayers were potentially entitled to $463,088 in FTP penalty relief.
The actual amount of the FTP penalty relief is dependent on each taxpayer’s circumstances.
Therefore, this is an estimate of the potential relief.

Recommendation 1: The Commissioner, Small Business/Self-Employed Division, should take
the necessary steps to provide FTP penalty relief to the 2,138 eligible taxpayers we identified,
including but not limited to abating FTP penalties.
Management’s Response: Small Business/Self-Employed Division management agreed
with the recommendation and adjusted the accounts for these 2,138 taxpayers to
provide them with the benefit of the penalty relief.
Office of Audit Comment: While the IRS’s corrective action satisfies the intent of
our recommendation, we did not evaluate that these taxpayers received the
penalty relief.

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Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to evaluate the accuracy of the administrative waiver for
the FTP penalty for Tax Years 2020 and 2021. To accomplish our objective, we:
• Evaluated the IRS’s processes for identifying and ensuring that only eligible taxpayers
received the automatic FTP penalty relief.
• Ensured that the IRS sent Letter 38 to eligible taxpayers notifying them of their
outstanding tax liability and the resumption of normal collection activities.

Performance of This Review
This review was performed with information obtained from the Small Business/Self-Employed
Division Headquarters and the Business Support Office, Office of Servicewide Penalties, located
in Washington, D.C., during the period July 2024 through July 2025. We conducted this
performance audit in accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on our audit objective. We
believe that the evidence obtained provides a reasonable basis for our findings and conclusions
based on our audit objective.

Data Validation Methodology
During this review, we obtained extracts from the Individual and Business Master Files for
Tax Years 2020 and 2021 that were available on TIGTA’s Data Center Warehouse. Additionally,
we obtained a file containing the Letters 38 from the IRS and the listing of tax accounts from the
IRS’s Master File provided to the IRS’s Information Technology organization for systemic FTP
penalty relief. Before relying on the data, we ensured that each file contained the specific data
elements we requested. In addition, we selected random samples of each extract and verified
that the data in the extracts were the same as the data captured in the Integrated Data Retrieval
System. We also performed analysis to ensure the validity and reasonableness of our data, such
as ranges of dollar values and obvious invalid values. Based on the results of our tests, we
believe that the data used in our review were reliable.

Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the
following internal controls were relevant to our audit objective: the process for planning,
organizing, directing, and controlling program operations for the issuance of the FTP penalty
relief. We evaluated these controls by verifying the eligibility of the FTP penalty relief, meeting
with IRS management, and reviewing IRS procedures to establish relief on taxpayers’ tax
accounts.

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Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

Appendix II
Outcome Measure
This appendix presents detailed information on the measurable impact that our recommended
corrective action will have on tax administration. The benefit will be incorporated into our
Semiannual Report to Congress.

Type and Value of Outcome Measure:
• Taxpayers Impacted: Potential; 2,138 eligible taxpayers with 2,248 tax accounts that did
not receive the FTP penalty relief (see Recommendation 1).

Methodology Used to Measure the Reported Benefit:
We obtained extracts from the Individual Master File and Business Master File for Tax Years 2020
and 2021 for tax accounts that contain an FTP penalty relief indicator as of April 4, 2024. We also
obtained the listing of tax accounts provided to the IRS Information Technology organization for
systemic FTP penalty relief. We compared the listings to identify 2,248 tax accounts for
2,138 taxpayers that are eligible for the FTP penalty relief but did not receive relief as of
April 4, 2024.
The IRS estimates 5 million tax returns are eligible for the penalty relief. This represents
$1 billion in savings to taxpayers, or about $206 per tax return. Using the IRS’s estimated savings
to taxpayers, we estimate that these 2,248 tax accounts were potentially entitled to $463,088
(2,248 x $206 = $463,088) in FTP penalty relief.

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Nearly Five Million Eligible Taxpayers Received Failure to
Pay Penalty Relief Due to the Effects of the Pandemic

Appendix III
Eligible Returns Described in Notice 2024-7
The FTP penalty relief granted only to eligible taxpayers who have filed an eligible return. An
eligible return is one of the following income tax returns:
Form 1040 series:
• Form 1040, U.S. Individual Income Tax Return
• Form 1040-C, U.S. Departing Alien Income Tax Return
• Form 1040-NR, U.S. Nonresident Alien Income Tax Return
• Form 1040-PR, Declaración de la Contribución Federal sobre el Trabajo por Cuenta
Propia
• Form 1040-SR, U.S. Tax Return for Seniors
• Form 1040-SS, U.S. Self-Employment Tax Return
Form 1120 series:
• Form 1120, U.S. Corporation Income Tax Return
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations
• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation
• Form 1120-FSC, U.S. Income Tax Return of Foreign Sales Corporation
• Form 1120-H, U.S. Income Tax Return for Homeowners Associations
• Form 1120-L, U.S. Life Insurance Company Income Tax Return
• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return
• Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts
• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies
• Form 1120-S, U.S. Income Tax Return for an S Corporation
• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B)
Form 1041 series:
• Form 1041, U.S. Income Tax Return for Estates and Trusts
• Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts
• Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts
Form 990-T, Exempt Organization Business Income Tax Return

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Nearly Five Million Eligible Taxpayers Received Failure to
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Appendix IV
Letter 38, Reminder, Notice Resumption 1

1
The example Letter 38 is for a fictional taxpayer.
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Nearly Five Million Eligible Taxpayers Received Failure to
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Nearly Five Million Eligible Taxpayers Received Failure to
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Appendix V
Management’s Response to the Draft Report

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Pay Penalty Relief Due to the Effects of the Pandemic

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Nearly Five Million Eligible Taxpayers Received Failure to
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Nearly Five Million Eligible Taxpayers Received Failure to
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Appendix VI
Glossary of Terms

Term Definition
The IRS database that consists of federal tax-related transactions and
Business Master File accounts for businesses. These include employment taxes, income taxes on
businesses, and excise taxes.

Closing agreements are used when it is advantageous to have a tax matter
Closing Agreement permanently and conclusively resolved under Internal Revenue Code
Section 7121.

A collection of IRS databases containing various types of taxpayer accounts
Data Center Warehouse and IRS and TIGTA employee information that is maintained by TIGTA for
the purposes of analyzing data for ongoing audits.

The IRS database that maintains transactions or records of individual tax
Individual Master File
accounts.

Integrated Data Retrieval An IRS computer system capable of retrieving or updating stored
System information. It works in conjunction with a taxpayer’s account records.

The primary source of instructions to employees relating to the
Internal Revenue Manual administration and operation of the IRS. The Manual contains the directions
employees need to carry out their operational responsibilities.

The IRS database that stores various types of taxpayer account information.
Master File This database includes individual, business, and employe plans and exempt
organizations data.

An agreement between a taxpayer and the IRS that settles a taxpayer's tax
Offer in Compromise
liabilities for less than the full amount owed.

A 12-month accounting period for keeping records on income and
Tax Year expenses used as the basis for calculating the annual taxes due. For most
individual taxpayers, the tax year is synonymous with the calendar year.

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Nearly Five Million Eligible Taxpayers Received Failure to
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Appendix VII
Abbreviations

FTP Failure to Pay
IRS Internal Revenue Service
TIGTA Treasury Inspector General for Tax Administration

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contact our hotline on the web at
https://www.tigta.gov/reportcrime-misconduct.

To make suggestions to improve IRS policies, processes, or systems
affecting taxpayers, contact us at www.tigta.gov/form/suggestions.

Information you provide is confidential, and you may remain anonymous.

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