Internal Revenue Bulletin No. 2026–17

IRS Provides Penalty Relief for Farmers and Fishermen Due to Form 8995 Delays

The IRS has issued two critical notices—Notice 2026-24 and Notice 2026-25—that collectively address penalty relief for qualifying farmers and fishermen while also adjusting housing expense limitations for 2026 under § 911. These actions reflect the IRS’s response to systemic delays in Form 8995 corrections, which have disproportionately impacted taxpayers reliant on seasonal income streams. Notice 2026-24 waives § 6654 penalties for underpayment of estimated taxes by farmers and fishermen who file their 2025 returns and pay any outstanding tax by April 15, 2026, providing a critical lifeline for an industry grappling with volatility. Meanwhile, Notice 2026-25 adjusts § 911 housing expense limitations for 2026, incorporating geographic cost disparities, and permits taxpayers to apply these 2026 adjustments retroactively to their 2025 tax year if the new limits are more favorable. This dual approach underscores the IRS’s recognition of both compliance burdens and economic realities facing these taxpayers, particularly in the wake of prior IRS corrections to Form 8995, which governs the 20% pass-through deduction under § 199A. The notices arrive amid broader scrutiny of the IRS’s handling of estimated tax penalties and foreign earned income exclusions, with practitioners noting that these measures may signal a broader trend toward administrative relief in response to procedural missteps.

The IRS’s decision to waive penalties under § 6654 for farmers and fishermen stems from delays in correcting Form 8995, which taxpayers rely on to claim the Qualified Business Income (QBI) deduction under § 199A. Section 6654 imposes penalties on individuals who fail to pay estimated taxes in sufficient amounts throughout the year, with the penalty calculated based on the underpayment amount multiplied by the IRS underpayment rate (currently 8% for Q3 2024). For farmers and fishermen, § 6654(i) provides a safe harbor, allowing them to avoid penalties if they pay their estimated tax in a single annual payment by March 1 (or the due date of the return, if earlier). However, the IRS’s recent corrections to Form 8995—which have left some taxpayers uncertain about their eligibility for the QBI deduction—have created a ripple effect, leaving many unable to accurately calculate their estimated tax obligations. Notice 2026-24 addresses this by waiving penalties for qualifying taxpayers who file their 2025 returns and pay any tax due by April 15, 2026, effectively providing retroactive relief for a compliance failure rooted in IRS procedural delays.

The context for these notices is deeply intertwined with the IRS’s 2023–2024 corrections to Form 8995, which exposed flaws in the calculation of the W-2 wage limitation for certain taxpayers. The IRS issued Notice 2023-64 to correct these errors, requiring taxpayers to recalculate their deductions and file amended returns if necessary. This correction process has been labor-intensive, with many taxpayers and practitioners reporting delays in receiving guidance or updates from the IRS. The resulting uncertainty has disproportionately affected farmers and fishermen, who often rely on seasonal income and may struggle to meet traditional quarterly estimated tax payment deadlines. By waiving penalties under these circumstances, the IRS acknowledges that the compliance burden has fallen disproportionately on taxpayers due to IRS errors, rather than taxpayer negligence.

Notice 2026-25, while focused on § 911 housing expense limitations, also reflects the IRS’s broader effort to align tax rules with geographic cost disparities. Section 911 allows U.S. citizens and resident aliens working abroad to exclude foreign earned income from taxation, subject to annual limits. The housing expense limitation under § 911(c) further permits the exclusion of housing costs, but these exclusions are capped based on local cost-of-living data. For 2026, the IRS has adjusted these limitations to reflect higher housing costs in certain cities, such as Hong Kong, London, and Tokyo, where the maximum housing exclusion now exceeds $100,000. Notably, the notice permits taxpayers to apply these 2026 adjustments retroactively to their 2025 tax year, providing an opportunity for tax planning and optimization. This flexibility is particularly valuable for taxpayers in high-cost cities, who may have underutilized exclusions in prior years due to outdated limitations.

For practitioners, these notices underscore the importance of staying abreast of IRS corrections and procedural updates, particularly for clients in agriculture, fishing, or foreign employment. The waiver of penalties under § 6654 for farmers and fishermen is a one-time relief measure, but it signals the IRS’s willingness to provide administrative flexibility in response to systemic issues. Practitioners should advise clients to document their eligibility for the waiver, including proof of farming or fishing income and filing compliance. Additionally, the retroactive application of § 911 housing expense limitations for 2025 presents an opportunity for tax planning, particularly for expatriates in high-cost cities. Taxpayers should review their 2025 returns to determine if the new limitations would result in a larger exclusion, and if so, consider filing an amended return. Finally, the notices highlight the need for proactive communication with the IRS, as procedural delays and corrections continue to create compliance challenges for taxpayers.

Waiver of Estimated Tax Penalties: Relief for Qualifying Farmers and Fishermen

The IRS’s issuance of Notice 2026-24 marks a targeted intervention to address systemic delays in the processing and correction of Form 8995, the Qualified Business Income Deduction Simplified Computation, which disproportionately impacted qualifying farmers and fishermen for the 2025 tax year. This relief underscores the IRS’s recognition of procedural bottlenecks as an unusual circumstance warranting penalty waivers under § 6654(e)(3)(A), a provision designed to mitigate hardship in cases where compliance challenges arise from factors beyond the taxpayer’s control. The notice arrives amid broader scrutiny of the IRS’s operational capacity, particularly in the wake of high-profile software corrections and the agency’s ongoing efforts to modernize e-filing systems.

The Rule: Waiving Penalties Under § 6654 for Farmers and Fishermen

§ 6654 of the Internal Revenue Code imposes an addition to tax (penalty) on individuals who fail to pay estimated income tax in sufficient amounts throughout the year. For most taxpayers, this requires four quarterly installments (April 15, June 15, September 15, and January 15 of the following year), each equal to 25% of the annual required payment. However, § 6654(i) provides a critical exception for qualifying farmers and fishermen, recognizing the seasonal and unpredictable nature of their income streams. Under this provision, a taxpayer qualifies if at least two-thirds of their gross income for the taxable year or the preceding year comes from farming or fishing. Instead of four quarterly payments, qualifying taxpayers are required to make a single annual estimated tax payment by January 15 of the following year. If this payment is not made, the taxpayer is generally subject to the § 6654 addition to tax unless they file their return and pay the full tax liability by March 1 (or the next business day if March 1 falls on a weekend or holiday).

The IRS’s authority to waive these penalties under § 6654(e)(3)(A) is discretionary and applies when the underpayment is due to "unusual circumstances" where imposing the penalty would be "against equity and good conscience." The notice explicitly invokes this authority, citing delays in the correction of Form 8995 instructions as the unusual circumstance. The IRS corrected the 2025 instructions for Form 8995 on January 27, 2026, but many taxpayers and preparers reported that they could not complete their returns until February 23, 2026, when updated tax software became available. This delay pushed the effective filing deadline for qualifying farmers and fishermen to March 2, 2026 (the first business day after March 1), creating a compliance gap that the IRS has now moved to address retroactively.

The Context: Procedural Delays, Industry Impact, and IRS Accountability

The issuance of Notice 2026-24 reflects a broader pattern of IRS operational challenges that have intensified in recent years, particularly as the agency grapples with the implementation of complex tax provisions like the Qualified Business Income Deduction (§ 199A) and the transition to mandatory e-filing. The 2025 Form 8995 corrections are not an isolated incident; they follow a series of high-profile software and instruction updates that have disrupted taxpayer compliance. For example, the IRS’s 2023 correction to Form 8995-A (the more complex version of the form) required thousands of taxpayers to file amended returns after the agency identified errors in the W-2 wage limitation calculation. Similarly, the 2024 transition to mandatory e-filing for Form 8995-A created logistical hurdles for practitioners, many of whom had to overhaul their filing systems on short notice.

The impact of these delays is particularly acute for farmers and fishermen, who often operate on tight margins and rely on seasonal income to meet their tax obligations. The January 27, 2026, correction to Form 8995—which adjusted the computation of taxable income before the qualified business income deduction—disrupted the ability of many taxpayers to file by the March 1 deadline. This is not merely a procedural inconvenience; for many in the agricultural and fishing industries, the March 1 deadline is a critical financial planning milestone, as it aligns with the end of the tax year and the start of a new planting or fishing season. The IRS’s decision to waive penalties for qualifying taxpayers who file and pay by April 15, 2026, provides a necessary buffer, but it also highlights the agency’s struggle to keep pace with the demands of modern tax administration.

Politically, the notice arrives at a time when the IRS is under increased congressional scrutiny for its handling of taxpayer service and enforcement operations. The Inflation Reduction Act of 2022 allocated $80 billion to the IRS, much of which was earmarked for technology upgrades and customer service improvements. However, the agency has faced criticism for slow rollouts of new systems, poor communication during corrections, and delays in processing refunds and amended returns. Notice 2026-24 can be read as a tacit acknowledgment of these challenges, offering a targeted solution to a problem that has left many farmers and fishermen in a state of uncertainty.

The Implication: What Practitioners Need to Know

For tax practitioners, Notice 2026-24 presents both an opportunity and a compliance challenge. The notice provides automatic penalty relief for qualifying farmers and fishermen who file their 2025 tax returns and pay any tax due by April 15, 2026. This relief applies to any taxpayer who meets the § 6654(i) criteria—i.e., those whose gross income for 2025 or 2024 was at least two-thirds from farming or fishing—and who satisfies the filing and payment deadline. The IRS has made clear that the waiver will apply automatically to taxpayers who qualify but do not report an addition to tax under § 6654 on their return.

However, practitioners must also advise clients who already filed their 2025 returns and reported an addition to tax under § 6654. For these taxpayers, the notice provides a pathway to abatement by filing Form 843, Claim for Refund and Request for Abatement. The instructions for Form 843 are specific:

• The form must include the notation "Request for Relief under Notice 2026-24" at the top.
• The taxpayer must check the box for "Penalty—Abatement or refund of a penalty or addition to tax due to reasonable cause or other reason allowed under the law."
• On line 3, the taxpayer must list the dates of any payment of tax liability and addition to tax under § 6654.
• On line 4, the taxpayer must check the box for "Income."
• On line 6, the taxpayer must enter "6654."
• On line 7, the taxpayer must check box c.
• On line 8, the taxpayer must provide a statement explaining why their circumstances satisfy the criteria for relief, including their status as a qualifying farmer or fisherman, the filing of their 2025 return, and the payment of any tax due by April 15, 2026.

Notably, the IRS has stated that taxpayers eligible for relief under this notice are not required to attach Form 2210-F solely to claim the waiver. This simplifies the process for practitioners, who can avoid the additional paperwork associated with the standard § 6654(i) penalty calculation.

The notice also serves as a reminder of the importance of proactive communication with the IRS. Taxpayers who encounter similar delays in future tax years should document their circumstances and consider filing for penalty relief proactively, rather than waiting for the IRS to issue guidance. The IRS’s willingness to waive penalties in this instance suggests that it may be receptive to similar requests in cases involving unforeseen software errors, natural disasters, or other extraordinary circumstances.

For the agricultural and fishing industries, the notice provides much-needed relief but also underscores the need for better planning and contingency measures. Practitioners should advise clients to monitor IRS announcements closely, particularly during periods of form corrections or software updates, and to build buffer time into their tax filing schedules to accommodate potential delays. The IRS’s decision to extend the deadline to April 15, 2026, aligns with the standard individual tax filing deadline, which may reduce confusion but also highlights the agency’s recognition that March 1 is no longer a feasible deadline for many taxpayers in light of modern tax administration challenges.

In the broader context of tax compliance, Notice 2026-24 reinforces the idea that penalty waivers are not a substitute for diligent planning. While the IRS has shown flexibility in this instance, practitioners should not assume that similar relief will be granted in future years without clear evidence of unusual circumstances. Instead, taxpayers and their advisors should focus on accurate and timely filing, meticulous record-keeping, and proactive communication with the IRS to avoid penalties altogether. The notice also serves as a case study in how IRS operational failures can ripple through the tax system, affecting even those taxpayers who are otherwise compliant. As the IRS continues to modernize its systems, practitioners must remain vigilant, advocating for their clients while also holding the agency accountable for the timeliness and accuracy of its guidance.

Adjusted Housing Expense Limitations for 2026: Geographic Cost Differences

The IRS’s annual adjustment of foreign housing expense limitations under § 911(c) reflects the agency’s ongoing effort to align the foreign earned income exclusion (FEIE) with real-world economic conditions. Notice 2026-25, issued on April 20, 2026, continues this tradition by updating the geographic cost adjustments for 2026, superseding the prior year’s guidance in Notice 2025-16. This adjustment is not merely procedural—it carries significant implications for U.S. taxpayers working abroad, particularly those in high-cost urban centers where housing expenses can dwarf the standard exclusion limits. The notice underscores the IRS’s commitment to ensuring that the FEIE remains responsive to global housing market disparities, even as it introduces a retroactive application option for the 2025 tax year. For practitioners, this notice serves as a critical tool for tax planning and compliance, particularly in light of the IRS’s heightened scrutiny of foreign income exclusions in recent years.

The Rule: What Notice 2026-25 Updates

Notice 2026-25 adjusts the limitation on housing expenses eligible for exclusion or deduction under § 911(c) for tax year 2026. The notice applies to qualified individuals who elect to exclude foreign earned income under § 911(a) and seek to exclude or deduct housing costs incurred while living abroad. The adjustments are based on geographic differences in housing costs relative to those in the United States, as authorized by § 911(c)(2)(B), which grants the Treasury Department and IRS authority to modify the standard housing expense limitations.

Under the general rule, the base housing amount for 2026 is calculated as 16% of the maximum foreign earned income exclusion amount, which for 2026 is $132,900. This results in a base housing amount of $21,264 for a full taxable year. The general limitation on housing expenses is set at 30% of the maximum exclusion amount, equating to $39,870 for 2026. However, the IRS may adjust these percentages for specific locations where housing costs significantly exceed U.S. averages. Notice 2026-25 provides these adjusted limitations for 185 locations worldwide, ranging from $40,000 in Riyadh, Saudi Arabia, to $116,900 in Geneva, Switzerland.

The notice also highlights the daily limitation for housing expenses, which is derived by dividing the annual limitation by 365. This granularity ensures that taxpayers who do not reside in a high-cost location for the entire year can still benefit from the adjusted limitations for the portion of the year they qualify under the FEIE.

The Context: Political, Industry, and Historical Factors

The adjustment of housing expense limitations is rooted in the broader evolution of the FEIE, which was established by the Tax Reform Act of 1978 to mitigate the double taxation of U.S. citizens and resident aliens working abroad. Over the decades, the FEIE has become a cornerstone of U.S. international tax policy, particularly for expatriates in high-cost cities where housing expenses can consume a disproportionate share of income. The IRS’s annual adjustments to housing limitations reflect a recognition that static exclusion limits fail to account for the vast disparities in global housing markets.

Politically, the FEIE has faced periodic challenges, particularly from lawmakers who argue that it enables tax avoidance by high-income earners. For example, in 2017, the Tax Cuts and Jobs Act (TCJA) retained the FEIE but capped the exclusion at $105,900 (adjusted for inflation in subsequent years). The TCJA also introduced § 962, which allows certain shareholders of controlled foreign corporations to elect to be taxed at corporate rates on foreign earnings, further complicating the landscape for expatriates. Despite these changes, the FEIE remains a critical tool for U.S. taxpayers abroad, and the IRS’s annual adjustments ensure its continued relevance.

Industry trends also shape the IRS’s approach to housing cost adjustments. The rise of digital nomadism and remote work has led to an increase in U.S. taxpayers claiming the FEIE while residing in lower-cost countries. However, the IRS has signaled growing concern about abuse of the FEIE, particularly among individuals who do not meet the bona fide residence test or physical presence test under § 911(a)(1). In 2023, the IRS issued Memorandum 2023-018, warning that taxpayers who claim the FEIE without meeting the statutory requirements may face audits, penalties, and disallowance of the exclusion. Notice 2026-25, with its detailed geographic adjustments, serves as both a compliance tool and a means of ensuring that the FEIE remains equitable for taxpayers in high-cost locations.

Historically, the IRS has published annual notices adjusting housing expense limitations since the 2006 taxable year, following the enactment of the American Jobs Creation Act of 2004, which expanded the FEIE. These adjustments have become increasingly granular, reflecting the IRS’s growing reliance on real-time housing cost data from sources such as the U.S. State Department’s Office of Overseas Buildings Operations and private real estate indices. The supersession of Notice 2025-16 by Notice 2026-25 continues this tradition, ensuring that the FEIE remains responsive to global economic conditions.

The Implication: What Practitioners Need to Know

For tax practitioners, Notice 2026-25 presents both opportunities and challenges. The most immediate implication is the need to review the adjusted housing limitations for clients residing in high-cost locations. For example, a taxpayer in Hong Kong can exclude up to $114,300 in housing expenses for 2026, compared to the standard limit of $39,870. Similarly, a taxpayer in Geneva, Switzerland, can exclude $116,900, while a taxpayer in Tokyo can exclude $67,300. These adjustments can significantly reduce taxable income for expatriates, but they also require meticulous documentation to substantiate housing expenses.

Practitioners must also be aware of the option to apply the 2026 adjusted limitations to the 2025 tax year. For locations where the 2026 limitations are higher than those in Notice 2025-16, taxpayers can elect to use the 2026 limits for 2025. This retroactive application can result in tax refunds or reduced liabilities for qualifying taxpayers. For example, if a taxpayer in Singapore incurred housing expenses of $80,000 in 2025, they could use the 2026 limitation of $86,700 to exclude the full amount, rather than the 2025 limitation of $78,000. To claim this benefit, taxpayers must file an amended return (Form 1040-X) or include the adjustment on their original 2025 return if filed before the notice’s issuance.

Another critical consideration is the impact of these adjustments on state tax filings. While the FEIE applies at the federal level, some states—such as California, New York, and Virginia—do not recognize the exclusion and require taxpayers to report foreign income in full. Practitioners must advise clients on the state tax implications of claiming the FEIE, particularly in high-tax states where the exclusion can result in significant savings at the federal level but increased liability at the state level.

The notice also serves as a reminder of the IRS’s increased scrutiny of foreign income exclusions. In recent years, the IRS has audited thousands of taxpayers claiming the FEIE, particularly those in high-cost cities or with complex foreign income structures. Practitioners should review client eligibility for the FEIE, ensuring that they meet the bona fide residence test or physical presence test, and that their housing expenses are properly documented. Failure to do so can result in disallowance of the exclusion, penalties, and interest.

Finally, Notice 2026-25 highlights the need for proactive tax planning for expatriates. Taxpayers should monitor IRS notices for future adjustments and consult with practitioners to optimize their FEIE claims. For example, taxpayers who plan to relocate to a high-cost city in 2026 may benefit from delaying certain housing expenses until the new year to maximize the exclusion. Similarly, those considering a return to the U.S. should evaluate the timing of their departure to ensure they meet the 330-day physical presence test.

In summary, Notice 2026-25 is more than a routine adjustment—it is a critical tool for tax planning and compliance for U.S. taxpayers abroad. Practitioners must leverage the updated limitations to minimize tax liabilities for their clients while ensuring strict adherence to IRS requirements. As the IRS continues to refine its guidance on the FEIE, proactive planning and documentation will be essential to avoid audits and penalties.

Key Takeaways for Tax Practitioners: Navigating the New IRS Guidance

The IRS’s issuance of Notice 2026-24 and Notice 2026-25 signals a deliberate effort to address timely compliance challenges and geographic disparities in tax planning, respectively. For practitioners, these notices demand immediate operational adjustments to avoid client penalties and optimize tax outcomes. The notices also reflect broader IRS trends: penalty relief for specific industries and adjustments to foreign tax exclusions in response to economic shifts.

Notice 2026-24 delivers targeted relief for farmers and fishermen grappling with Form 8995 delays, a critical issue given the sector’s reliance on seasonal income streams. The IRS waives estimated tax penalties under § 6654(i) if qualifying taxpayers meet the April 15, 2026, filing and payment deadline. This is not merely procedural—it underscores the IRS’s recognition of industry-specific hardships, particularly as supply chain disruptions and climate volatility continue to strain agricultural operations. Practitioners must prioritize client education on the eligibility criteria for this relief, ensuring clients document ≥2/3 of income from farming or fishing and file Form 2210-F to claim the waiver. For those who already incurred penalties, the IRS allows abatement requests via Form 843, provided the underpayment was not willful and reasonable cause is demonstrated. The notice also serves as a reminder of the IRS’s discretionary authority under § 6654(e)(3)(A), which has increasingly been invoked for disaster-related relief—a trend likely to persist given the frequency of extreme weather events.

Notice 2026-25, meanwhile, adjusts the housing expense limitations for the Foreign Earned Income Exclusion (FEIE) under § 911(c), reflecting geographic cost differences that directly impact expatriates’ tax liabilities. The updated limitations—published annually by the IRS—allow taxpayers to exclude housing costs above a base amount (16% of the FEIE limit) up to a maximum threshold (30% of the limit). For 2026, practitioners should leverage these adjustments to minimize client tax burdens, particularly for those in high-cost cities like Hong Kong or London, where the exclusion can exceed $100,000. A critical nuance: the IRS permits taxpayers to apply these 2026 adjustments retroactively to the 2025 tax year, offering a planning opportunity for clients who may have overpaid in prior filings. This flexibility aligns with the IRS’s broader push for proactive tax planning, as seen in recent revenue procedures and court rulings that emphasize documentation and compliance.

The notices also intersect with recent IRS corrections to Form 8995, the Qualified Business Income (QBI) deduction form, which has been plagued by calculation errors and e-filing mandates. Practitioners should audit prior-year returns for potential § 199A deduction overstatements due to incorrect W-2 wage limitations, as highlighted in IRS Notice 2023-64 and subsequent guidance. The IRS’s increased scrutiny of high-income taxpayers’ pass-through deductions—evidenced by Tax Court cases like Williams v. Commissioner—demands meticulous record-keeping and software updates to align with 2024 revisions.

In the broader context, these notices reflect the IRS’s dual focus on compliance and relief, a balance shaped by political pressures (e.g., agricultural lobbying for penalty waivers) and economic realities (e.g., inflation-driven housing cost adjustments). The IRS’s discretionary waiver authority under § 6654(e)(3)(A) and its annual FEIE updates demonstrate an agency adapting to global workforce trends and industry-specific crises. For practitioners, the takeaway is clear: proactive planning, client education, and strict adherence to IRS deadlines are non-negotiable. The notices serve as a call to action—to review client portfolios, update filing strategies, and prepare for the IRS’s escalating enforcement in these areas.