Home / Guides

IRS Penalties and Interest Rate: How Your Balance Grows

By the Tax Relief Answers editors · Sources checked November 3, 2026 · How we check

The short answer

If you file late, the IRS charges a failure-to-file penalty of 5% of the unpaid tax for each month or part of a month, up to 25%. If you pay late, the failure-to-pay penalty is 0.5% a month, also up to 25%, and interest (7% a year for individuals for the quarter starting October 1, 2026, compounded daily) runs on the tax and the penalties until you pay. Filing on time, even if you cannot pay, avoids the larger penalty. Sources: the IRS failure-to-file (updated October 5, 2026), failure-to-pay and quarterly interest rate pages.

How much does each charge add?

The IRS charges a full month's penalty even if you pay in full before the month ends.

What happens when both penalties apply in the same month?

The failure-to-file penalty is reduced by that month's failure-to-pay penalty. The IRS gives the example itself: 4.5% for failure to file plus 0.5% for failure to pay, instead of 5%. After 5 months the failure-to-file penalty stops growing, but the failure-to-pay penalty continues until it reaches 25%.

What a balance grows to: illustration

Illustration, not your bill. Assumptions: tax shown on a return, nothing paid until the end of the period, no payment plan, extension or levy notice. Interest is 7% a year, the individual rate for the quarter starting October 1, 2026 (IR-2026-98, August 21, 2026), assumed to hold; the IRS resets it each quarter (IRC 6621(a)(2)). Interest is compounded daily (IRC 6622) on the tax only; interest on penalties would add more. Rounded to the dollar.

Return filed on time, tax paid late. Failure-to-pay penalty of 0.5% a month under IRC 6651(a)(2), plus interest:

Return also filed late, $10,000 of tax. The failure-to-file penalty is 4.5% a month for 5 months (5% reduced by the 0.5% failure-to-pay, IRC 6651(c)(1)), then stops at $2,250:

The $525 minimum penalty does not change these rows. Your IRS online account or notice shows your real balance.

Steps that reduce each charge

1. File now, even if you cannot pay. This stops the failure-to-file penalty, the larger one. An extension gives more time to file, not to pay.
2. Pay what you can. The failure-to-pay penalty and interest are figured on what remains unpaid.
3. Set up a payment plan. For individuals who filed on time, the failure-to-pay penalty drops to 0.25% a month during an approved plan. See the IRS payment plan.
4. Ask for First Time Abate. The IRS can remove failure-to-file and failure-to-pay penalties of any amount if the same type of return was filed on time for the prior 3 years with no penalties (other than the estimated tax penalty), or with penalties removed for reasonable cause. Call the number on your notice or send Form 843. See first-time penalty abatement. For 2025 tax year returns and later, the IRS administrative relief page says a new Automatic Exemption from Penalty means people with that 3-year record are not assessed these penalties at all.
5. Ask for reasonable cause relief if something outside your control stopped you. The IRS reasonable cause page lists examples such as fires and natural disasters, inability to get records, death or serious illness in the immediate family, and system issues. Lack of funds alone does not qualify.
6. Act before a levy notice deadline. The failure-to-pay rate doubles to 1% starting 10 days after a notice of intent to levy.

What does not reduce penalties or interest?

The IRS does not remove interest for reasonable cause or as first-time relief, but it automatically reduces the related interest when a penalty is removed. Relying on a preparer, not knowing the rules and simple oversights generally are not reasonable cause. A paid company requests the same abatement you can request yourself by phone or with Form 843.

FAQ