IRS Penalties and Interest, Explained With Examples

If you file late and owe tax, the penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. When both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount. Returns more than 60 days late also carry a minimum penalty that's adjusted for inflation each year. Filing on time — even without paying — avoids this penalty entirely.

The failure-to-pay penalty is 0.5% of the unpaid tax for each month it remains unpaid, up to 25%. It drops to 0.25% per month while an approved installment agreement is in effect (if you filed on time) and rises to 1% per month starting 10 days after the IRS issues a notice of intent to levy.

Interest is charged on unpaid tax from the original due date and on most penalties from the date they're assessed. The rate is the federal short-term rate plus 3 percentage points, set quarterly — currently 7% a year for individuals — and it compounds daily. The current rate is published on the IRS quarterly interest rates page.

Suppose you filed on time but didn't pay $10,000 of tax:

• Failure-to-pay penalty: 0.5% × 12 months ≈ $600.
• Interest at 7% compounded daily ≈ $725 on the tax, plus a smaller amount on the penalty.
• Total after one year: roughly $11,350.

If you hadn't filed either, add a failure-to-file penalty of up to 25% — another $2,250 or more after five months. Try your own numbers in the penalty and interest calculator.

• First-time abatement: if you had no penalties in the prior 3 years and are current on filing (and paying or on a plan), the IRS generally removes failure-to-file, failure-to-pay and failure-to-deposit penalties for one year. You can often request it by phone.
• Reasonable cause: serious illness, death in the family, natural disaster, or inability to obtain records. Explain what happened and include documentation, using Form 843 or a letter.
• Statutory exception: written advice from the IRS that turned out to be wrong.

When a penalty is removed, the interest charged on it is removed too. See penalty abatement.

• Estimated tax penalty: for self-employed people and others who don't pay enough during the year; calculated like interest on each missed quarterly payment.
• Failure-to-deposit penalty: for businesses that pay payroll taxes late, 2% to 15% depending on timing.
• Accuracy-related penalty: 20% of an underpayment caused by negligence or a substantial understatement, often seen after an audit or CP2000.
• Dishonored payment penalty: for a check or electronic payment that bounces.

First-time abatement covers failure-to-file, failure-to-pay and failure-to-deposit penalties — not accuracy or estimated tax penalties.

Generally no — interest is required by law. It can be reduced only when it's tied to an abated penalty or, in limited cases, an unreasonable IRS error or delay. The best way to limit interest is to pay down the balance as quickly as you can, or get on a plan.

When you know where you stand, the next step is choosing a resolution. Our tax settlement calculator asks 8 questions about your balance, income and situation and shows which IRS programs — payment plan, Offer in Compromise, Currently Not Collectible or penalty abatement — your answers point toward. It's free and doesn't affect your credit.