Yes, the IRS charges interest on payment plans, and you'll owe penalties too

When you set up an IRS payment plan, you still owe interest on the unpaid balance. The IRS charges interest at a rate set by law—currently 8% per year, though it changes quarterly. You also owe a failure-to-pay penalty of 0.5% per month on whatever you haven't paid yet. Both of these accrue daily and compound, meaning the longer your plan runs, the more you owe beyond the original tax bill.

The interest and penalties are separate from your monthly payment. If your tax bill is $5,000 and you set up a 24-month plan, you're paying down that $5,000 plus interest and penalties that keep growing until the final payment clears. The IRS doesn't waive interest or penalties just because you're on a plan—the plan is simply a way to pay what you owe over time instead of in one lump sum.

Key Takeaways

  • Interest accrues daily on your unpaid tax balance at a rate the IRS sets quarterly, currently 8% per year.
  • You also owe a failure-to-pay penalty of 0.5% per month on the unpaid amount, separate from interest.
  • Both interest and penalties continue to grow throughout your payment plan unless you pay off the balance early.
  • Paying the full amount upfront or as quickly as possible reduces the total interest and penalties you'll owe.
  • The IRS can lower or remove penalties in some cases if you have reasonable cause, but interest cannot be waived.

How the interest rate is set and when it changes

The IRS interest rate is tied to the federal short-term rate plus 3 percentage points. The IRS announces the new rate each quarter—January, April, July, and October—and it takes effect on the first day of the next month. This means your interest rate can change while you're in the middle of a payment plan.

You can find the current interest rate on the IRS website under "Interest Rates." The rate applies to all unpaid taxes, regardless of which year the tax is from. If you're paying taxes from 2021 and 2023 at the same time, both balances accrue interest at the same quarterly rate.

The failure-to-pay penalty and how it stacks with interest

The failure-to-pay penalty is 0.5% of your unpaid tax per month, charged on the 21st day after the IRS sends you a notice and demand for payment. This penalty runs until you pay in full or until it reaches 25% of your original tax bill. Unlike interest, the penalty has a cap.

Here's how they work together: if you owe $3,000 in taxes, the IRS charges you 8% annual interest on that $3,000 (about $20 per month) plus 0.5% monthly penalty (about $15 per month). Both amounts are calculated on your unpaid balance, so as you make payments, the interest and penalty amounts shrink slightly each month. But if you're on a 36-month plan, you're paying interest and penalties for three years straight.

When the IRS might reduce or remove penalties

The IRS can lower or remove the failure-to-pay penalty if you show reasonable cause—meaning you had a legitimate reason for not paying on time. Examples include serious illness, a death in the family, or relying on a tax professional's bad advice. You have to request this in writing, usually on Form 843 (Claim for Refund and Request for Abatement), and you have to explain why you couldn't pay when the bill was due.

Interest cannot be waived or reduced under any circumstances. The IRS treats interest as a cost of borrowing money from the government, similar to how a bank charges interest on a loan. Even if your penalty is removed, the interest keeps accruing.

If you're on a payment plan and want to request penalty relief, contact the IRS at 800-829-1040 or submit Form 843 by mail. The IRS typically takes 6 to 12 weeks to respond to a penalty abatement request.

How to calculate what you'll actually pay over the life of your plan

The IRS doesn't provide a simple calculator for total cost, but you can estimate it yourself. Take your unpaid tax balance, multiply it by the current interest rate (8% annually, or about 0.67% per month), and add the monthly penalty (0.5% of the unpaid balance). Repeat this for each month of your plan, subtracting your monthly payment from the balance each time.

For a concrete example: you owe $4,000 in taxes and set up a 24-month plan at $200 per month. At 8% annual interest and 0.5% monthly penalty, your first month costs roughly $27 in interest and penalties combined. By month 12, when your balance is lower, that cost drops to about $13. Over 24 months, you'll pay roughly $240 to $300 in interest and penalties on top of your $4,800 in payments.

The exact amount depends on when you start the plan (because the interest rate may change mid-plan) and how consistently you make payments. Missing a payment or paying late can trigger additional penalties.

Why paying faster reduces what you owe

Every dollar you pay early is a dollar that stops accruing interest and penalties. If you can pay $400 one month instead of the agreed $200, that extra $200 goes straight to reducing your balance, and you stop paying interest on it immediately.

Some payment plans allow you to pay more without penalty. The IRS short-term payment plan (for balances under $25,000) and the long-term installment agreement both let you pay ahead. If you get a tax refund, bonus, or inheritance, applying it to your tax debt can shorten your plan by months or years and save you hundreds in interest and penalties.

What happens if you miss a payment on your plan

Missing a payment doesn't automatically cancel your plan, but it does trigger consequences. The IRS charges a $25 failure-to-pay penalty for each missed payment (or $225 if you've missed payments before). Your plan may be terminated if you miss three consecutive payments, which means the full remaining balance becomes due immediately.

If your plan is terminated, the IRS can resume collection action—wage garnishment, bank levy, or tax lien. Interest and penalties continue to accrue on the full balance while you're out of compliance. If you miss a payment, contact the IRS as soon as possible to explain and ask about making up the payment or adjusting your plan.

Frequently Asked Questions

Can I get the interest waived if I'm on a payment plan?

No. The IRS does not waive interest under any circumstances. Interest is treated as a cost of borrowing from the government and accrues for the entire time your balance is unpaid. You can request that penalties be reduced or removed if you have reasonable cause, but interest will continue to accrue.

Does the interest rate change while I'm paying?

Yes. The IRS adjusts its interest rate quarterly, on January 1, April 1, July 1, and October 1. If you're on a 36-month plan and the rate changes, your new interest will be calculated at the new rate going forward. The IRS will notify you of rate changes, but your monthly payment amount typically stays the same unless you request a modification.

What's the difference between interest and the failure-to-pay penalty?

Interest is a percentage of your unpaid tax balance charged annually (currently 8%). The failure-to-pay penalty is 0.5% per month on the unpaid balance, capped at 25% total. Both accrue daily and are separate charges. Interest cannot be waived; penalties can be reduced if you show reasonable cause.

If I pay off my plan early, do I save money on interest?

Yes. Every payment you make stops interest from accruing on that amount. If you pay off your balance six months early, you stop paying interest and penalties for those six months. The IRS does not charge a prepayment penalty, so there's no downside to paying faster if you're able to.

How do I know how much interest I've paid so far?

The IRS sends you a statement each year showing interest and penalties charged. You can also log into your IRS account at IRS.gov to view your balance, payment history, and interest accrued. Call 800-829-1040 if you need a detailed breakdown of interest and penalties on your account.