The IRS charges interest on unpaid taxes, and that interest keeps running while you pay through a plan
The interest rate on an IRS payment plan is not separate from the interest on your tax debt itself. The IRS charges one rate—called the underpayment rate—on all unpaid federal income taxes. That rate applies whether you pay in full immediately or spread the payment across months or years. The rate changes quarterly and is tied to the federal short-term rate plus 3 percentage points.
As of early 2024, the underpayment rate is 8 percent per year, compounded daily. This means interest accrues on your original tax bill, on any penalties already added, and on the interest that has already accumulated. The rate can go up or down each quarter, so if you are on a long payment plan, your total interest cost may change over time.
A payment plan does not stop interest from running. It only lets you pay what you owe over time instead of all at once. You will still owe the full amount of interest that accumulates from the date the tax was due until the date you pay it off completely.
Key Takeaways
- The IRS underpayment rate is currently 8 percent per year and changes every quarter based on federal rates.
- Interest compounds daily on your tax debt, penalties, and previously accrued interest while you are on a payment plan.
- The longer your payment plan lasts, the more total interest you will owe, even though your monthly payment stays the same.
- You can find the current quarterly rate on the IRS website, and the rate that applies to your debt is the one in effect when your tax return was due.
How the quarterly rate is set and when it changes
The IRS publishes a new underpayment rate every three months. The rate for each quarter is the federal short-term rate (set by the U.S. Treasury) plus 3 percentage points. The federal short-term rate itself changes based on Treasury bond yields, so the IRS rate can move up or down depending on broader economic conditions.
The rate that applies to your specific tax debt is determined by when your return was due. If your 2023 return was due April 15, 2024, the rate in effect on April 15, 2024 is the one that applies to your 2023 taxes. That rate will continue to apply to your 2023 debt even if the quarterly rate changes later. However, if you owe taxes from multiple years, each year's debt may have a different rate attached to it.
You can find the current and past quarterly rates on the IRS website under "Interest Rates." The IRS also publishes the rates in the Federal Register and sends notices to tax professionals. If you are setting up a payment plan, the IRS will tell you the exact rate being applied to your debt in the payment plan agreement.
How interest adds up over the life of a payment plan
Interest compounds daily, which means each day's interest is calculated on the growing total—not just on the original tax amount. On a $10,000 tax debt at 8 percent annual interest, you would owe roughly $800 in interest over one year if you made no payments. But if you spread that $10,000 across a 24-month plan, you would pay more than $800 in total interest because interest keeps accruing on the unpaid balance each month.
The IRS provides a payment plan calculator on its website that shows you an estimate of how much interest you will owe based on the plan length you choose. The calculation is approximate because the quarterly rate could change, but it gives you a realistic picture of the total cost. A shorter payment plan means less total interest; a longer plan means more total interest, even though your monthly payment is smaller.
Penalties also accrue interest. If the IRS assessed a failure-to-file penalty or failure-to-pay penalty on top of your tax bill, interest runs on those penalties too. This is why the total amount you owe can grow noticeably even while you are making regular payments.
The difference between short-term and long-term payment plans
The IRS offers two main types of payment plans: short-term (120 days or less) and long-term (more than 120 days). Both charge the same underpayment interest rate, but the way you set them up and what fees you pay differ.
A short-term plan has no setup fee if you set it up online or by phone. You simply agree to pay the full amount within 120 days. Interest still runs the whole time, but because the plan is short, the total interest cost is lower than a longer plan would be.
A long-term plan (called an installment agreement) does have a setup fee, which ranges from $31 to $225 depending on how you set it up and your income level. Low-income taxpayers may may have access to for a reduced fee. The longer the plan, the more interest you will owe overall, but your monthly payment will be lower because you have more months to pay.
What happens if you miss a payment or extend your plan
If you miss a payment on your plan, the IRS may terminate the agreement and demand full payment of the remaining balance. Interest continues to run on any unpaid amount, and you may also owe a failure-to-pay penalty on top of the interest already accrued.
If you need to extend your payment plan—for example, if your financial situation changes and you cannot afford the monthly payment—you can request a modification. The IRS will recalculate your payment based on the new timeline, and interest will continue to accrue at the current quarterly rate. Extending the plan means paying more total interest, but it may be necessary if you cannot keep up with the original schedule.
Some taxpayers also choose to pay off their plan early if they come into money. Paying early stops interest from accruing on the remaining balance, so it can save you a significant amount if you have several years left on the plan.
How to find out the exact interest rate on your specific debt
The IRS will tell you the interest rate being applied to your debt in your payment plan agreement. When you set up a plan online through IRS.gov or by calling the IRS, you will receive a document that lists the rate, the amount of tax owed, the amount of interest accrued to date, and the total you will pay over the life of the plan.
You can also call the IRS at 1-800-829-1040 to ask about the rate on your specific tax year. Have your Social Security number and the tax year in question ready. The IRS representative can tell you the rate that applies and estimate how much interest you will owe if you set up a plan.
If you received a notice from the IRS about your tax debt, that notice may also show the interest rate and the amount of interest accrued as of the notice date. Interest continues to accrue after the notice is sent, so the amount will be higher by the time you set up a payment plan.
Frequently Asked Questions
Can I negotiate a lower interest rate on my payment plan?
No. The underpayment rate is set by law and applies to all taxpayers. The IRS does not negotiate rates based on individual circumstances. However, paying off your plan early will reduce the total interest you owe because interest stops accruing once the debt is paid in full.
Does the interest rate change while I am on a payment plan?
The quarterly rate can change, but the rate that applies to your specific tax debt is locked in based on when your return was due. If you owe taxes from multiple years, each year's debt has its own rate. Interest continues to compound daily at that rate throughout your payment plan.
What if the IRS rate goes up after I start my plan?
The rate increase does not affect the interest already accrued on your debt. It only affects new interest that accrues going forward. Your monthly payment amount stays the same unless you request a modification, but the total interest cost may increase if rates rise and you are still paying off the plan when the new rate takes effect.
Is there a way to avoid interest on a payment plan?
No. Interest is required by law on all unpaid federal taxes. The only way to avoid additional interest is to pay your tax bill in full before the due date. Once taxes are unpaid, interest accrues regardless of whether you have a payment plan or not.
How much will I actually pay in interest over a 36-month plan?
It depends on the amount of tax owed and the rate in effect. The IRS payment plan calculator on IRS.gov will give you an estimate for your specific situation. As a rough example, on a $15,000 tax debt at 8 percent interest over 36 months, you would owe approximately $1,800 to $2,000 in total interest, but this varies based on the exact rate and timing.