The IRS charges interest on unpaid taxes, whether you set up a payment plan or not
The interest rate on an IRS payment plan is the same as the interest rate on any unpaid federal tax debt. The IRS does not charge a separate, higher rate for choosing to pay over time. What you owe is the original tax amount plus interest that accrues from the due date of your return until you pay in full.
The interest rate itself changes quarterly. The IRS sets it based on the federal short-term rate plus 3 percentage points. This means the rate you pay depends on which quarter your debt falls into, not on the payment plan you choose. As of early 2024, the rate has ranged between 8 and 9 percent annually, but you should check the IRS website or your payment plan agreement for the exact rate that applies to your debt.
Interest compounds daily. That means each day the unpaid balance grows slightly, and the next day's interest is calculated on that larger amount. A payment plan does not stop this compounding—it only lets you spread the payments across months or years instead of paying the full amount at once.
Key Takeaways
- The IRS interest rate on payment plans is the same as on any unpaid tax debt and changes quarterly based on federal rates.
- Interest accrues from your original tax return due date, not from the date you set up the payment plan.
- Interest compounds daily, so the longer you take to pay, the more total interest you will owe.
- You can find the current quarterly rate on the IRS website or in your payment plan agreement letter.
- A payment plan reduces the monthly payment amount but does not reduce the interest rate or stop interest from building.
How the quarterly rate is set and when it changes
The IRS publishes a new interest rate every three months, on the first day of January, April, July, and October. The rate is always the federal short-term rate rounded up to the nearest whole percent, plus 3 percentage points. The federal short-term rate itself is set by the U.S. Treasury and reflects current borrowing costs.
Your rate is locked in for the quarter in which your tax debt is assessed. If you owe taxes from 2022 and set up a payment plan in January 2024, you use the rate in effect for that quarter. If you are still paying in April 2024, the rate may change, but only for new interest that accrues after April 1—not retroactively on what you already owe.
The IRS publishes these rates on its website under "Interest Rates" in the Tax Professionals section. You can also find the rate in the payment plan agreement letter you receive after you set up the plan. That letter will show the exact percentage you are being charged.
What happens to interest while you are on a payment plan
Interest keeps accruing every single day you have an unpaid balance, even after you have set up a payment plan and made your first payment. The plan does not pause or reduce the interest rate. It only changes how much you pay each month and how long you have to pay.
For example, if you owe $5,000 in taxes and interest is accruing at 8 percent annually, you are adding roughly $11 per day to your debt. If you set up a 24-month payment plan, your monthly payment might be around $220, but that payment covers both principal (the original tax) and the interest that has built up since your last payment. The interest portion of each payment grows smaller as your principal balance shrinks.
This is why paying off the plan faster saves you money. If you can pay the full amount in 12 months instead of 24, you cut the total interest roughly in half because interest stops accruing once the debt is paid in full.
Penalties are separate from interest and also apply to payment plans
The IRS charges two types of penalties on unpaid taxes: a failure-to-file penalty and a failure-to-pay penalty. These are separate from interest and are calculated differently. The failure-to-pay penalty is typically 0.5 percent of the unpaid tax per month, up to 25 percent total. This penalty also applies whether you are on a payment plan or not.
Some penalties can be reduced or removed if you have a reasonable cause for the late payment or late filing. If you set up a payment plan quickly after receiving a notice, the IRS may consider that a sign of good faith, but it does not automatically remove penalties. You would need to request penalty relief separately, either through the payment plan setup process or by contacting the IRS directly.
Your payment plan agreement will show the total amount owed, including both the original tax, any penalties, and the interest that has accrued to date. As you make payments, interest continues to build on the remaining balance.
How to find your exact interest rate and what it costs you
The easiest way to find your rate is to look at your payment plan agreement letter from the IRS. This letter arrives after you set up the plan and clearly states the interest rate being applied to your debt. It also shows the total amount you owe and the monthly payment amount.
You can also call the IRS at 1-800-829-1040 and ask a representative for your current interest rate. Have your Social Security number and tax year ready. The representative can tell you the rate and explain how much interest is accruing per day on your specific balance.
To estimate your total interest cost, multiply your current unpaid balance by the annual interest rate, then divide by 12 to get the monthly interest accrual. For a $10,000 balance at 8 percent interest, that is roughly $67 per month in interest alone. If your monthly payment is $200, about one-third goes to interest and two-thirds to principal in the early months. As the balance shrinks, more of each payment goes to principal.
Payment plan setup fees also add to your total cost
The IRS charges a one-time setup fee to establish a payment plan. The fee ranges from $31 to $225 depending on which type of plan you choose and how you set it up. A short-term payment plan (120 days or less) costs $31. A long-term installment agreement costs between $31 and $225, with lower fees if you set it up online or through automatic bank withdrawal.
This setup fee is separate from interest and penalties. It is added to your total debt and begins accruing interest immediately. So if you owe $5,000 and the setup fee is $225, your total debt becomes $5,225, and interest accrues on that full amount from day one of the plan.
Choosing automatic bank withdrawal (also called a direct debit installment agreement) qualifies you for the lowest setup fee and also ensures you never miss a payment, which prevents additional penalties and late fees.
What to do if the interest rate seems wrong or you want to pay faster
If you believe the interest rate on your agreement letter is incorrect, contact the IRS at 1-800-829-1040 with your agreement letter in hand. The representative can confirm the rate that should apply to your tax year and quarter.
If you want to pay off the plan faster and reduce total interest, you can make extra payments at any time without penalty. There is no prepayment fee on IRS payment plans. Any extra payment goes directly to principal and stops accruing interest immediately on that amount. If your agreement allows, you can also request to modify the plan to a shorter timeline.
Some people find that a lump-sum payment from a tax refund, bonus, or inheritance makes sense if it means cutting years off the payment plan. The interest savings can be substantial. For example, paying off a $10,000 debt in one year instead of five years at 8 percent interest saves roughly $1,600 in interest charges.
Frequently Asked Questions
Does the interest rate change if I switch from one payment plan to another?
No. The interest rate is based on your tax debt and the quarter it was assessed, not on the payment plan type. If you switch from a 60-month plan to a 36-month plan, the rate stays the same. Only the monthly payment amount and the total time to pay change.
Can I deduct the interest I pay on an IRS payment plan?
Interest on federal income taxes is not deductible on your personal tax return. However, if the tax debt is related to a business, you may be able to deduct business-related interest. Consult a tax professional about your specific situation.
What happens to interest if I miss a payment on my plan?
Interest continues to accrue on the unpaid balance. Missing a payment does not pause or reduce interest. It also puts you at risk of the IRS terminating the plan and demanding full payment, plus adding a failure-to-pay penalty.
Is the interest rate lower if I pay by automatic bank withdrawal?
No. Automatic bank withdrawal lowers your setup fee but does not change the interest rate you pay on the debt itself. The interest rate is determined by the IRS quarterly rate, not by your payment method.
How much interest will I pay over the life of my payment plan?
That depends on your balance, the interest rate, and how long the plan lasts. You can estimate it by multiplying your balance by the annual rate and dividing by 12 to get monthly interest, then multiplying by the number of months in your plan. Your payment plan agreement letter may also show a total interest estimate.