Yes, the IRS charges interest on any unpaid tax balance, whether you pay in full or set up a payment plan

Interest accrues daily on the amount you owe. The IRS calls this the failure-to-pay penalty and interest, and they are separate charges that stack on top of your original tax debt. A payment plan does not stop interest from running — it only lets you spread the payments over time while interest continues to grow.

The interest rate changes quarterly. As of 2024, the rate is 8 percent per year, compounded daily. That means if you owe $5,000 and make no payments for a year, you will owe roughly $400 more in interest alone, plus any penalties. The exact amount depends on when you set up the plan and how long you take to pay.

The sooner you pay off the balance, the less interest you will pay overall. Even if you can only afford small monthly payments, starting them immediately costs you less than waiting.

Key Takeaways

  • Interest on unpaid taxes runs at 8 percent per year (as of 2024) and compounds daily, regardless of whether you have a payment plan.
  • The IRS also charges a failure-to-pay penalty of 0.5 percent per month on top of interest, which adds up quickly on large balances.
  • A payment plan stops the penalties from growing only if you make all payments on time; missing even one payment restarts the penalty clock.
  • Paying off your balance faster reduces the total interest you will owe, so paying more than the minimum monthly amount saves money.
  • The interest rate adjusts every quarter, so the cost of a long payment plan may be higher than a short one.

How interest and penalties stack on a payment plan

When you owe taxes, the IRS charges two separate things: interest and penalties. Interest is the cost of borrowing the money. The penalty is a charge for paying late. Both run at the same time, even after you set up a payment plan.

The failure-to-pay penalty is 0.5 percent of your unpaid taxes per month (or part of a month). If you owe $10,000, that is $50 per month in penalty alone. The penalty stops growing only when you pay the full balance or when the IRS stops collection efforts — which rarely happens while you are on a payment plan.

Interest compounds daily at the quarterly rate set by the IRS. For 2024, that rate is 8 percent per year. On a $10,000 balance, that works out to roughly $2.19 per day in interest. Over a year, that is about $800 in interest plus $600 in penalties — $1,400 added to your original debt before you have paid a dime toward the principal.

If you miss a payment on your plan, the failure-to-pay penalty can increase to 1 percent per month. That is why staying current on your payment plan is critical — one missed payment can nearly double the monthly penalty.

The quarterly interest rate and how it affects your total cost

The IRS sets the interest rate every three months based on the federal short-term rate plus 3 percentage points. The rate can go up or down, which means the cost of a long payment plan is unpredictable.

If you are on a 60-month plan and the rate rises from 8 percent to 9 percent halfway through, your interest charges for the second half will be higher than the first half. You cannot lock in a rate, and the IRS does not notify you of changes — you find out when you receive your next bill or check your account on IRS.gov.

This is one reason to pay faster if you can. A 24-month plan costs less in total interest than a 60-month plan, even if the rate stays the same. If rates rise, the difference is even larger.

Payment plan types and how interest applies to each

The IRS offers three main payment plan types: short-term, long-term installment, and Currently Not Collectible status. Interest and penalties apply differently to each.

Short-term plans are for balances under $100,000 and give you up to 180 days to pay. Interest and the failure-to-pay penalty run the entire time. There is no setup fee for a short-term plan.

Long-term installment plans are for balances over $100,000 or when you need more than 180 days. You can pay over up to 72 months. Interest and penalties run the entire time. The IRS charges a setup fee of $31 to $225 depending on how you set up the plan (online is cheaper). The fee is added to your balance, so you pay interest on it too.

Currently Not Collectible (CNC) status pauses collection efforts, but interest and penalties keep running. You owe the full amount plus all accrued interest and penalties once the IRS lifts CNC status, which can happen if your financial situation improves.

How to reduce the interest you pay on a payment plan

The most direct way to reduce interest is to pay off the balance faster. If your plan allows it, send extra payments toward the principal. The IRS applies extra payments to interest first, then penalties, then principal — so extra money does reduce what you owe, but it takes longer to reach the principal than you might expect.

Another option is to pay the full balance before setting up a plan. If you can borrow the money at a lower rate than 8 percent, that may cost less overall. Some people use a personal loan, credit card, or a loan against retirement savings to pay the IRS in full and then pay back the lower-rate loan.

If your financial situation changes and you can pay a lump sum, contact the IRS and ask to settle the account early. There is no penalty for paying early, and you will stop accruing interest immediately.

You can also request an Offer in Compromise if you cannot pay the full amount even with a payment plan. The IRS may accept less than you owe, which stops interest from running on the forgiven portion. However, the IRS rarely accepts these offers, and the process takes months.

What happens if you miss a payment on your plan

Missing even one payment can restart penalties and change the terms of your plan. The failure-to-pay penalty jumps from 0.5 percent per month to 1 percent per month if you miss a payment. Interest continues to compound daily on top of that.

If you miss a payment, contact the IRS as soon as possible. If you catch it within a few days, you may be able to make the payment and avoid the higher penalty. If you miss multiple payments, the IRS can terminate your plan and demand full payment immediately, plus all accrued interest and penalties.

If you know you cannot make a payment, call the IRS before the due date and ask about your options. You may be able to defer a payment, adjust the plan, or move to CNC status temporarily.

Frequently Asked Questions

Can I deduct the interest I pay on a payment plan from my taxes?

No. Interest on income taxes is not deductible. However, if you borrowed money to pay the IRS, the interest on that loan may be deductible depending on the type of loan and your situation. Consult a tax professional for your specific case.

Does the interest rate ever go down?

Yes, the IRS adjusts the rate every quarter based on the federal short-term rate. If rates fall, your interest charges will be lower going forward. However, you cannot predict when or by how much the rate will change.

What if I pay off my plan early — do I owe all the interest?

No. Interest accrues only on the days you actually owe the money. If you pay off your plan in 30 months instead of 60, you pay interest for 30 months, not 60. Paying early always saves money on interest.

Is there a way to stop interest from running while I am on a payment plan?

No. Interest runs on any unpaid tax balance until you pay it in full. A payment plan does not pause or reduce interest — it only lets you spread payments over time while interest continues to accrue.

How much does a payment plan cost in setup fees?

Short-term plans (under 180 days) have no setup fee. Long-term installment plans cost $31 if you set up online, $225 if you set up by phone or mail. The fee is added to your balance, so you pay interest on it.