IRS payment plans charge interest and penalties on top of what you owe
No, IRS payment plans are not interest-free. When you set up a payment plan with the IRS, you still owe interest on the unpaid balance, plus failure-to-pay penalties that accrue daily until the debt is settled. The interest rate is set by federal law and changes quarterly—it was 8% annually as of early 2024, but check the IRS website for the current rate. Penalties start at 0.5% of your unpaid tax per month and increase if you miss a payment on the plan itself.
The payment plan itself does not add extra fees beyond interest and penalties, but the IRS does charge a one-time setup fee that ranges from $31 to $225 depending on which type of plan you choose and how you set it up. If you pay by direct debit from your bank account, the fee is lower. If you miss a payment on the plan, the IRS can terminate it and demand the full balance immediately.
Key Takeaways
- Interest accrues daily on your unpaid tax balance at a rate set quarterly by the IRS, currently around 8% annually, regardless of whether you have a payment plan.
- Failure-to-pay penalties add 0.5% of your unpaid tax each month until you settle the debt, and they increase if you miss a payment on the plan.
- The IRS charges a one-time setup fee between $31 and $225 depending on the plan type and payment method you choose.
- Setting up a payment plan stops the IRS from taking collection action like wage garnishment or bank levy, but does not stop interest and penalties from growing.
How interest and penalties stack on a payment plan
When you owe federal income tax, the IRS charges two separate costs on top of the original amount: interest and penalties. Interest is calculated daily on your unpaid balance using a rate the IRS publishes every three months. Penalties begin accruing the day after your tax return was due (or the day you filed, if you filed late) and continue until you pay in full.
A payment plan does not pause either of these. If you owe $5,000 and set up a 24-month plan, interest and penalties keep growing on the remaining balance each month. This means your total cost to settle the debt is higher than the original $5,000. The longer the plan, the more interest and penalties you pay overall.
The failure-to-pay penalty is separate from the failure-to-file penalty (which applies if you did not file a return at all). If you file on time but do not pay, you face the failure-to-pay penalty. If you both file late and pay late, both penalties can apply, though the combined rate is capped at 47.5% of your unpaid tax.
Types of IRS payment plans and their setup fees
The IRS offers three main payment plan types, each with a different setup fee. A short-term payment plan lets you pay in full within 180 days and costs $31 to set up if you pay by direct debit, or $225 if you pay by check, money order, or credit card. This plan is the cheapest option because you pay off the debt quickly and interest accrues for a shorter time.
A long-term installment agreement spreads payments over more than 180 days. If you set it up by direct debit, the fee is $31; if you use other payment methods, it is $225. Some taxpayers with lower incomes may may have access to for a reduced fee of $31 regardless of payment method.
A streamlined installment agreement is available if you owe $50,000 or less in combined tax, penalties, and interest. The setup fee is $31 if you pay by direct debit, or $225 otherwise. This plan has less paperwork and faster approval than a standard agreement, but you still pay interest and penalties on the full balance.
What happens to interest and penalties if you miss a payment
If you miss a payment on your IRS plan, the agency can terminate the agreement and demand the full remaining balance immediately. When this happens, you also face an additional penalty: the failure-to-pay penalty increases from 0.5% per month to 1% per month for each month the plan is in default. Interest continues to accrue on the unpaid balance at the quarterly rate.
The IRS typically sends a notice before terminating the plan, giving you a chance to catch up. If you receive a termination notice, contact the IRS right away to explain the missed payment and ask to reinstate the plan. Reinstating a terminated plan may cost another setup fee, depending on the circumstances.
To avoid default, set up your payment amount so you can actually afford it each month. If your financial situation changes and you cannot make the payment, contact the IRS before the due date to request a modification to the plan or a temporary delay.
How to lower the total cost of your tax debt
Because interest and penalties grow every month, the fastest way to lower your total cost is to pay off the debt as quickly as possible. A short-term plan (under 180 days) costs far less in interest than a long-term plan, even though both charge the same setup fee. If you can pay the full amount within six months, that is almost always cheaper than spreading payments over years.
If you cannot pay in full quickly, look at whether you may have access to for Currently Not Collectible (CNC) status. This temporarily pauses collection action (wage garnishment, bank levies) but does not stop interest and penalties from accruing. CNC is useful if you are facing a financial hardship and need breathing room, but it does not reduce what you owe.
Another option is an Offer in Compromise, which allows you to settle your tax debt for less than the full amount owed. This requires proving you cannot pay the full amount and meeting strict financial criteria. The IRS charges a $225 application fee for an Offer in Compromise, and approval is not may provide. If you are approved, you stop paying interest and penalties once the offer is accepted.
Direct debit saves money on setup fees
Choosing to pay your IRS plan by direct debit from your bank account reduces your setup fee from $225 to $31. Over the life of a payment plan, this $194 difference is real money. Direct debit also reduces the risk of missing a payment because the IRS withdraws the money automatically on a date you choose.
To set up direct debit, you need your bank account number and routing number. You can authorize it through the IRS website, by phone, or by mail. If you change banks or close the account linked to the plan, update your payment method with the IRS immediately to avoid a missed payment and plan termination.
Frequently Asked Questions
Can I get the interest waived on an IRS payment plan?
No. Interest is required by federal law and the IRS cannot waive it. However, the IRS can abate (remove) penalties in limited situations—for example, if you have a clean compliance history and the failure was due to reasonable cause, or if the IRS made an error. You must request penalty abatement in writing and provide documentation of your reason.
Does the interest rate change while I am on a payment plan?
Yes. The IRS adjusts the interest rate every three months based on federal rates. If rates go up, your interest cost increases; if rates go down, your cost decreases. The rate applies to your remaining unpaid balance, so paying faster reduces the impact of rate changes.
What is the difference between interest and penalties on my IRS bill?
Interest is a percentage of your unpaid tax charged daily. Penalties are separate charges—the failure-to-pay penalty is 0.5% per month, and the failure-to-file penalty (if you filed late) is 5% per month. Both are added to your bill and both continue to grow while you are on a payment plan.
Is an IRS payment plan cheaper than borrowing money to pay the full amount?
It depends on the interest rate you would pay on a loan. If you can borrow at 5% or less and pay off your tax debt in under a year, a loan might cost less than the IRS interest rate (currently around 8%). However, a loan also requires approval and has its own fees. Compare the total cost of both options before deciding.
What happens to my payment plan if I file another tax return while I am still paying?
If you owe taxes on a new return while still paying an old plan, the IRS will typically add the new debt to your existing plan or create a separate plan. Contact the IRS to discuss how the new debt affects your current payment schedule. Owing additional taxes can increase your monthly payment or extend the plan length.