The increasing population and surge in energy consumption require significant upgrades to make energy grids intelligent, adaptable, and more efficient. The transition from conventional energy grids to smart grids (SGs) has been significantly propelled by the integration of Internet of Things (IoT) technologies, which enable real-time monitoring, automation, and data-driven decision-making throughout all layers of the energy system. This paper discusses the inclusion of IoT technologies in SG layers, examines how IoT facilitates enhanced data collection, system reliability, and real-time management at each functional layer. It also covers smart grid architecture, explains the role of Advanced Metering Infrastructure (AMI), and analyzes each communication layer to facilitate secure and efficient information flow. As the adoption of IoT-enabled devices with SGs accelerates, one of the biggest challenges is cybersecurity. In the context of power systems, where a successful cyberattack could cause cascading failures with far-reaching consequences, this vulnerability becomes even more critical. The stability of all grid-dependent sectors, including homes, businesses, healthcare institutions, and transportation systems, could be compromised by disruptions in grid operations and energy infrastructure. This paper studies security problems and challenges in IoT-enabled SGs, such as denial-of-service (DoS) attacks, data injection, and device spoofing. To overcome these challenges and threats, mitigation areas with their techniques, such as encryption, intrusion detection systems, and blockchain-based approaches, have been discussed, along with the future directions in this field.