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IRS Penalties and Interest

If you owe back taxes, your balance steadily grows each month that it remains unpaid. After the filing deadline has passed, the IRS will begin to charge both penalties and interest on the amount owed. These charges can quickly increase your balance.

The IRS stops charging penalties and interest only after you have resolved your tax debt permanently or the entire tax debt is forgiven. There are two types of penalties charged on tax debt, which are explained below.

irs penalties and interest

Failure-to-Pay Penalty

A failure-to-pay penalty is charged when you file your taxes but do not pay your full tax liability. The penalty charged for failure-to-pay is 0.5%. This type of penalty is charged each month on the total tax debt.

Failure-to-File Penalty

If you are required to file a return and you do not file, then the IRS charges failure-to-file penalty. Usually, the rate at which the failure-to-file penalty is 5%. In rare cases, however, it can reach to a maximum of 25% per month.

If you do not file your return and also do not pay your taxes, then both the 5% failure-to-file penalty and the 0.5% failure-to-pay penalties is charged. However, the IRS cannot charge penalties at more than 5% per month even if both failure-to-pay and failure-to-file penalties apply. Therefore, the maximum penalty that you will pay cannot be more than 5% per month.

Interest

In addition to penalties, the IRS also charges interest on tax debt. The interest is charged at the federal short-term rate plus 3% for a year. It is compounded daily and does not include payment extensions.

The IRS keeps charging both penalties and interest even after you have qualified for a payment plan and begin making payments. The penalties and interest stop only after the entire tax debt is paid off or the case is resolved permanently.

To avoid paying more in penalties and interest, you should make efforts to resolve your tax debt early. The earlier the resolution is achieved, the less you will pay to the IRS.