IRS Interest Penalties

The IRS charges interest penalties on late tax payments. The interest is referred to as a penalty because the purpose of the interest is to penalize you for paying late, not generate additional revenue for the IRS. In other words, the interest is to motivate you to pay on time. Any tax payments not made on time will accrue an interest penalty beginning on the first date the payment is late and continuing until the full balance, including accrued interest, is paid off.

Time Frame

Almost always, interest begins to accrue on the date when your tax return is due. For most people, tax returns are due on April 15, so for most people, interest begins to accrue on April 16.

What About Extensions?

Extensions allow you extra time to file a return and pay your taxes, but that extra time isn't necessarily free. because you most likely have to pay interest during the extension period. Even if you get an extension to file your return, interest will accrue from April 16.

When Will It Stop?

If you have a tax bill that is accruing interest, you are probably anxious for it to end. The only real way to stop the interest from piling up is to pay off the full amount of tax due, including interest accrued to the payoff date, plus any other penalties that may have been tacked on.

Can Interest Be Forgiven?

The IRS has limited authority to negotiate settlements with taxpayers, but those settlements are the exception, not the rule. For example, in certain circumstances you might qualify for an Offer in Compromise from the IRS. However, most taxpayers must pay off the full amount of the tax bill, and as long as you don't, you will accrue more interest.

Avoiding penalties

The simple answer is: Pay your taxes by April 15 each year. As long as you pay on time, you will not have to pay interest. Paying the tax is, by itself, painful enough, so why pay late and add interest penalties?

How Much Interest?

The amount of interest you pay on late taxes depends on several factors, including how late your payment is, how much in total taxes you owe and the federal short-term rate at the time your past taxes are due. Generally speaking, the IRS interest rate on late taxes is the federal short-term plus 3 percent. The applicable tax rate is adjusted every three months, so the interest rate can change as long as your taxes are outstanding.

Additional Penalties

In addition to the interest described in the previous section, you will have to pay a late penalty. The late penalty is typically 0.5 percent of the total taxes that you are late on. For example, if you owe $1,000 in taxes but pay one month late, you will pay interest, compounded daily, for the month. You will also pay a late penalty of about $5. The penalty can increase to 1 percent if you wait too long to pay your taxes. Finally, if you don't file on time, you will have to pay 5 percent of the total taxes owed.