How IRS Penalties and Interest Work

Understanding how the IRS calculates penalties and interest can help you minimize additional charges and make informed decisions about tax resolution strategies.

Common IRS Penalties

Failure to File Penalty

• 5% of unpaid taxes for each month or part of a month
• Maximum penalty: 25% of unpaid taxes
• Minimum penalty: $485 if return is over 60 days late

Failure to Pay Penalty

• 0.5% of unpaid taxes for each month or part of a month
• Maximum penalty: 25% of unpaid taxes
• Reduced to 0.25% if installment agreement is in place

Interest Calculations

The IRS charges interest on both unpaid taxes and penalties. Interest rates are determined quarterly and compound daily. Current rates are typically 3-8% annually.

Penalty Relief Options

First-Time Penalty Abatement

Taxpayers with a clean compliance history may qualify for first-time penalty abatement, which can remove failure-to-file and failure-to-pay penalties.

Reasonable Cause

Penalties may be removed if you can demonstrate reasonable cause for non-compliance, such as serious illness, natural disasters, or other circumstances beyond your control.

Strategies to Minimize Penalties and Interest

• File returns on time, even if you can't pay
• Set up payment plans to reduce ongoing penalties
• Request penalty abatement when eligible
• Consider offers in compromise for significant debt reduction