Dollar figures in this piece are for tax year 2026.
Owing the IRS is not itself a penalty. Three charges attach to an unpaid balance. A failure-to-pay penalty of 0.5% of the unpaid tax per month (up to 25%). Interest at the federal short-term rate plus 3 percentage points, compounded daily. And a failure-to-file penalty of 5% per month if the return is late. A payment plan does not stop interest, but for someone who filed on time it cuts the failure-to-pay penalty in half.
Below: how each charge works, what a payment plan changes, and a computed example of paying a balance in full against spreading it over 12 months. If you filed an extension and are watching October 15, start with what still has to happen after an extension. If the balance came from a notice, the notice guide comes first.
The three charges
Failure to pay. Section 6651(a)(2) adds 0.5% of the unpaid tax for each month or part of a month it stays unpaid, to a maximum of 25%. The percentage applies to the tax shown on the return, reduced by any amount paid before the month began, so each payment shrinks the base for later months. The exception is reasonable cause.
Failure to file. Section 6651(a)(1) adds 5% of the tax due for each month or part of a month the return is late, to a maximum of 25%. For any month when both penalties apply, the filing penalty is reduced by the payment penalty, so the combined charge is 5% a month, not 5.5%. On a return more than 60 days late, the 2025 Form 1040 instructions put the minimum at $525 or the tax owed, whichever is smaller.
Interest. Interest runs from the original due date to the date of payment at the underpayment rate, the federal short-term rate plus 3 percentage points. The Code sets the short-term rate for the first month of each calendar quarter, so the rate you pay changes every three months. I do not quote a current rate here because it will have moved by the time you read this. The IRS posts it each quarter. Interest compounds daily.
The charges side by side
| Charge | Rate | Cap | Starts |
|---|---|---|---|
| Failure to pay (§ 6651(a)(2)) | 0.5% of unpaid tax per month or part | 25% | Day after the payment due date |
| Failure to pay, installment agreement in effect (§ 6651(h)) | 0.25% per month | 25% | Same, if the return was filed on time |
| Failure to file (§ 6651(a)(1)) | 5% per month or part, less the payment penalty | 25% | Day after the filing due date, with extensions |
| Interest (§§ 6601, 6621) | Short-term rate + 3 points, reset quarterly, daily compounding | None | Original payment due date, extensions disregarded |
The form says it that way. Here is what it means.
| What you read | What it means |
|---|---|
| 0.5% of the unpaid tax for each month or part of a month, up to 25% | |
| 5% of the tax due for each month or part of a month the return is late, reduced by the payment penalty for months both apply, up to 25% | |
| The federal short-term rate plus 3 percentage points, reset each quarter and compounded daily | |
| A written agreement to pay in installments, which cuts the payment penalty to 0.25% a month if you filed on time | |
| The request for an extension of time to pay, filed by the return due date, showing undue hardship | |
| A failure to pay despite ordinary business care, or payment that would cause undue hardship |
How the charges stack
Interest and the penalty are separate, and they overlap. A balance of $12,000 unpaid for a month carries the penalty on $12,000 and interest on $12,000. The next month, interest also builds on the interest already added.
Interest on the failure-to-file penalty runs from the return due date, extensions included, so that penalty starts earning interest immediately. Interest on the failure-to-pay penalty is different: it applies only if the penalty is not paid within 21 calendar days of notice and demand (10 business days if the amount is $100,000 or more). Paying the tax stops the clock on that amount from the day the payment arrives.
The payment penalty rate can also go up. It rises from 0.5% to 1% a month beginning after the day 10 days after a notice of intent to levy is given. That is one reason to call before the IRS escalates, not after.
Ways to pay, and ways to spread it out
Paying electronically is simple. IRS Direct Pay moves money from a checking or savings account at no cost, and EFTPS, which requires enrollment, is also free. Card and digital-wallet payments run through private processors that charge a fee. Your IRS online account also takes balance payments.
If you cannot pay in full, there are two tools: an installment agreement and an extension of time to pay. Under section 6159 the IRS may enter a written agreement to take payment in installments when that facilitates collecting the tax. You apply online at IRS.gov/OPA or with Form 9465, and a user fee applies. The amount depends on how you apply and how you pay, so check the current fee on IRS.gov. The 1040 instructions note that even with an agreement you are charged interest and may be charged a late-payment penalty, and that you should weigh cheaper options such as a bank loan or card first.
An extension of time to pay is narrower. Under section 6161 the IRS can extend payment for a reasonable period not over 6 months. The 1040 instructions say to request it on Form 1127 by the return due date and to show undue hardship. Interest still runs.
For individuals owing $10,000 or less of tax, section 6159(c) requires the IRS to accept an installment agreement if several conditions are met: no unfiled returns, unpaid tax or earlier installment agreement in the past 5 years, financial inability to pay in full, and payment in full within 3 years. Ask whether you qualify rather than assuming. The IRS can alter or terminate an agreement for a missed payment, usually after 30 days' notice, so a plan you cannot keep is worse than none.
Example, hypothetical: $12,000 owed on a 2026 return
A single filer files a 2026 return on time and owes $12,000 on April 15, 2027. Compare three paths, all at an assumed 7% interest rate (the actual rate is reset each quarter), with interest compounded daily on a 365-day basis.
Pay in full on April 15. No penalty and no interest.
12-month installment agreement, in effect from April 15. Level monthly payments of $1,038.55 on the 15th, May 15, 2027 through April 15, 2028, with the last payment $1,038.59. Interest comes to $462.64. The penalty at 0.25% a month on the tax still unpaid at the start of each month is $188.64 (payments applied to tax first, a simplification). Total extra cost: $651.28. Without the reduced rate, the same penalty would be $377.28, so the agreement's rate cuts about $189.
Pay nothing for 12 months, then pay all. Interest of $872.48 plus a penalty of 0.5% for 12 months, $720.00, for $1,592.48 extra, with the 25% cap not reached.
The model leaves out the user fee, interest on the penalty, and any change in the quarterly rate. The shape holds: extra cost grows with how long the principal stays unpaid, so a shorter plan costs less. A 6-month plan on the same inputs costs $350.82 extra and a 24-month plan $1,249.65.
- Interest
- Failure-to-pay penalty
| Interest | Failure-to-pay penalty | |
|---|---|---|
| Pay in full | $0 | $0 |
| 6-month plan | $247.37 | $103.45 |
| 12-month plan | $462.64 | $188.64 |
| 24-month plan | $899.61 | $350.04 |
| Nothing for 12 months | $872.48 | $720 |
Interest and penalty added to the $12,000, assumed 7% interest rate, return filed on time.
Computed: § 6651(a)(2) and (h), § 6601 and § 6622; assumed 7% rate; hypothetical inputs
| Interest plus penalty paid to date | |
|---|---|
| May | $99.23 |
| Jun | $192.41 |
| Jul | $275.24 |
| Aug | $351.57 |
| Sep | $419.44 |
| Oct | $477.44 |
| Nov | $528.26 |
| Dec | $569.53 |
| Jan | $603.17 |
| Feb | $628.16 |
| Mar | $643.68 |
| Apr | $651.28 |
Cost builds fastest early, while the unpaid balance is largest.
Computed: assumed 7% interest rate; 0.25% monthly penalty; hypothetical inputs
Getting penalties reduced
The statute removes the penalty when the failure is due to reasonable cause and not willful neglect. For payment, the regulation asks whether you used ordinary business care in providing for the tax and were nevertheless unable to pay or would suffer undue hardship. Lavish spending or speculative investments will not meet that test.
First-time abatement is an administrative practice, not a rule in the Code, and the Tax Court has said so. It generally depends on a clean recent history. The penalty abatement article covers the details and how to ask. Penalty relief does not erase interest on the tax itself, so paying sooner still matters.
The collection clock
The Code gives the IRS 10 years from assessment to collect by levy or court proceeding, with extensions in some cases, including a collection period agreed in writing with an installment agreement. The clock does not make waiting a strategy, because interest and penalties continue meanwhile. For how long assessments and refunds stay open, see the statute of limitations article.
Common mistakes
- Not filing because you cannot pay, which swaps a 0.5% monthly penalty for a 5% one.
- Assuming an extension to file is an extension to pay, when interest runs from the original due date.
- Assuming an installment agreement stops interest, which it does not.
- Expecting the reduced 0.25% rate on a late-filed return, since section 6651(h) requires a return filed on time, extensions included.
- Signing up for a plan whose payments you cannot keep, then missing one.
- Paying the IRS with a credit card at a processor fee that may exceed the penalty you are trying to avoid.
The usual way versus doing it right
Wait and hope
- Skip filing because you cannot pay
- Treat an extension to file as time to pay
- Assume a plan stops interest
File, pay what you can, then plan
- File on time, which keeps the 5% penalty off
- Pay by the original due date, since interest runs from it
- Expect interest to keep running under a plan, and keep the payments you sign up for
What to do
File on time
File by April 15 or by the extended date even if you cannot pay. Filing is what keeps the 5% penalty off.
Pay what you can now
Direct Pay or EFTPS cost nothing, and each dollar paid stops both interest and penalty on that dollar.
Price the options
Compare a plan, a loan or a card against the cost of interest plus the penalty at the current quarterly rate.
Apply for a plan early
Use IRS.gov/OPA or Form 9465 as soon as you know you cannot pay in full, before any levy notice.
Set up automatic payments
A missed installment can lead to termination, usually with 30 days' notice.
Ask about penalty relief
If a penalty bill arrives, see whether first-time abatement or reasonable cause fits.
If you want someone to run the numbers on your balance and set up a plan, that is the work of IRS problem resolution. To prevent the balance in the first place, see tax planning.
