The IRS charges two separate penalties when you pay taxes late: a failure-to-pay penalty and interest on the unpaid amount.

The failure-to-pay penalty is 0.5% of your unpaid taxes for each month or part of a month that the payment is late. This penalty starts the day after your tax deadline and continues to accrue until you pay in full or the IRS issues a notice of intent to levy. The maximum penalty is 25% of your unpaid tax.

Interest is separate from the penalty. The IRS charges interest on both your unpaid taxes and any penalties you owe. The interest rate changes quarterly and is set at the federal short-term rate plus 3%. For 2024, the rate is 8% per year, compounded daily. Interest continues to accrue until you pay everything you owe.

If you owe $5,000 in taxes and pay 60 days late, you would owe the 0.5% penalty for two months (1% of $5,000 = $50) plus interest on both the $5,000 and the penalty amount. The longer you wait, the more interest compounds.

Key Takeaways

  • The failure-to-pay penalty is 0.5% per month, capped at 25% of what you owe, and starts the day after your tax deadline.
  • Interest accrues daily at a rate that changes quarterly; for 2024 it is 8% per year on both taxes and penalties combined.
  • The IRS can reduce or remove the failure-to-pay penalty if you show reasonable cause, such as a serious illness or death in your family.
  • Setting up a payment plan does not stop penalties and interest from accruing, but it prevents the IRS from taking collection action while you pay.
  • Penalties and interest are separate charges; you owe both unless the IRS grants relief.

When the penalty clock starts and stops

The failure-to-pay penalty begins the day after your tax return is due. For most people filing individual income tax, that is April 16 in 2024 (the deadline shifted one day because April 15 fell on a Monday and the 16th was a holiday observance). If you file an extension, the penalty starts the day after the extended deadline, typically October 15.

The penalty stops accruing once you pay the full amount owed. If you owe $3,000 and pay $1,500 on day 45, the penalty continues on the remaining $1,500. The IRS does not prorate the penalty based on partial payments.

If the IRS issues a notice of intent to levy—a formal notice that they plan to seize your wages, bank account, or property—the failure-to-pay penalty stops growing at that point. However, interest continues to accrue until you pay in full.

How interest compounds on top of penalties

Interest is calculated daily on your unpaid tax balance. Each day, the IRS adds a small amount to what you owe. That interest then earns interest the next day, which is why the total grows faster the longer you wait.

The interest rate is tied to the federal short-term rate and changes every three months. The IRS publishes the new rate in January, April, July, and October. You can find the current rate on the IRS website under "Interest Rates." The rate applies to all taxpayers equally—the IRS does not charge different rates based on income or circumstances.

If you owe $10,000 and wait a full year to pay, interest alone could add $800 or more to your bill, depending on the rate that quarter. Add the failure-to-pay penalty (up to 6% for a full year) and you could owe $1,400 in penalties and interest combined.

Penalties are higher if you do not file at all

If you do not file your tax return by the deadline, the IRS charges a failure-to-file penalty in addition to the failure-to-pay penalty. The failure-to-file penalty is 5% per month, up to 25%, and it accrues much faster than the failure-to-pay penalty.

If you both fail to file and fail to pay, the IRS subtracts the failure-to-pay penalty from the failure-to-file penalty for any month where both apply. So in the first month, you owe 5% (failure-to-file) minus 0.5% (failure-to-pay) = 4.5% total. But if you file late and then pay on time, you only owe the failure-to-file penalty.

Filing even a few days late triggers this penalty. There is no grace period. If your return is due April 15 and you file April 16, the penalty clock has started.

How to reduce or remove penalties

The IRS can remove the failure-to-pay penalty if you show reasonable cause. Reasonable cause means you had a good reason for paying late that was beyond your control. Examples include serious illness, death in your family, a natural disaster, or reliance on incorrect advice from a tax professional.

You must request penalty relief in writing. Send a letter to the IRS address on your notice explaining what happened and when. Include supporting documents: a doctor's note for illness, a death certificate, photos of storm damage, or an email from your tax preparer. The IRS reviews these requests and decides whether to grant relief.

If you have a history of paying on time, the IRS is more likely to grant relief. If you have multiple late payments or penalties in prior years, your request is less likely to succeed. The IRS also considers whether you made a good-faith effort to pay, such as making a partial payment or setting up a payment plan.

Interest cannot be removed. Even if the IRS forgives the penalty, you still owe interest on the unpaid tax from the original due date until you pay.

Payment plans and how they affect penalties

Setting up an installment agreement with the IRS does not stop penalties and interest from accruing. You continue to owe both while you make monthly payments. However, a payment plan does prevent the IRS from taking collection action—such as wage garnishment or bank levies—while you are making payments on time.

The IRS offers short-term payment plans (120 days or fewer) and long-term installment agreements (longer than 120 days). Short-term plans have no setup fee. Long-term plans charge a setup fee that ranges from $31 to $225 depending on how you set up the plan and your income level.

You can request a payment plan by phone, mail, or through the IRS website. The IRS will tell you the total amount you owe including penalties and interest, and what your monthly payment would be. If you miss a payment, the plan can be terminated and collection action can resume.

What happens if you ignore the debt

If you do not pay and do not respond to IRS notices, the penalties and interest continue to grow. After several notices, the IRS can file a federal tax lien against your property, which damages your credit and makes it difficult to sell a home or refinance a loan.

The IRS can also levy your wages, meaning your employer is ordered to send a portion of your paycheck directly to the IRS. A levy can take up to 25% of your disposable income. The IRS can also seize your bank account or take other property to satisfy the debt.

Once the IRS files a lien or levy, the only way to stop collection action is to pay in full, set up a payment plan, or request an offer in compromise (a settlement for less than you owe). An offer in compromise is difficult to obtain and requires showing that you cannot pay the full amount even over time.

Frequently Asked Questions

Can the IRS waive interest charges?

No. The IRS cannot remove interest under any circumstances. Interest is a charge for the time value of money owed to the government. You can only reduce your total debt by paying as soon as possible, which stops interest from accruing further.

What if I pay my taxes late but before the IRS sends a notice?

You still owe the failure-to-pay penalty and interest. The penalty is automatic and applies whether or not the IRS has contacted you. Paying early does not erase penalties that have already accrued, but it stops them from growing further.

Do state taxes have the same penalties as federal taxes?

No. Each state sets its own penalty and interest rates. Some states charge higher penalties than the IRS; others charge lower ones. Check your state tax agency website for the specific rates that apply to you.

If I file an extension, do I still owe penalties for paying late?

Yes. An extension gives you more time to file your return, but it does not extend the payment deadline. If you owe taxes and do not pay by April 15, penalties and interest start accruing even if you filed an extension. You should pay what you estimate you owe by the original deadline to avoid penalties.

How do I know what my current balance is with penalties and interest included?

Log into your IRS account at IRS.gov, call the IRS at 1-800-829-1040, or check the notice the IRS sent you. The notice shows the original tax owed, penalties, interest, and the total due as of that date. Interest continues to accrue after the notice is issued, so the actual amount owed will be slightly higher.