The IRS charges a failure-to-pay penalty of 0.5% per month on unpaid federal income tax, plus interest that compounds daily

The failure-to-pay penalty starts the day after your tax deadline and accrues at one-half of one percent (0.5%) for each month or part of a month that your tax remains unpaid. The penalty caps at 25% of what you owe. This is separate from interest, which the IRS also charges on the unpaid balance. Interest rates change quarterly and are set by the IRS based on the federal short-term rate plus 3%; for 2024, the rate is 8% per year, compounded daily.

If you file your return late and owe tax, you face both a failure-to-file penalty and a failure-to-pay penalty. The failure-to-file penalty is 5% per month (capped at 25%), but it reduces by the amount of the failure-to-pay penalty in any month where both apply. The combined effect is that you pay the higher of the two, not both in full.

State tax agencies charge their own late-payment penalties and interest. These vary by state but typically range from 5% to 10% annually, plus interest rates between 4% and 12% per year. Contact your state tax authority directly for the exact rate that applies to you.

Key Takeaways

  • The federal failure-to-pay penalty is 0.5% per month on unpaid tax, capped at 25% total, and starts the day after your tax deadline.
  • Interest compounds daily on the unpaid balance at a rate set quarterly by the IRS (currently 8% annually for 2024) and continues to accrue until you pay.
  • If you file late and owe tax, you pay both penalties, but the failure-to-file penalty reduces by the failure-to-pay penalty each month, so you do not pay both in full.
  • State penalties and interest rates vary widely; you must check your state tax agency's website or call them to learn what you owe on a state return.
  • Setting up a payment plan with the IRS stops the failure-to-pay penalty from growing, though interest continues to accrue on the remaining balance.

When the penalty starts and how it grows

The failure-to-pay penalty begins on April 16 for most taxpayers (the day after the April 15 deadline). If you file an extension, the penalty does not start until the extended deadline passes—typically October 15. The penalty accrues monthly: if you owe $5,000 and do not pay by May 15, you owe an additional $25 in penalties (0.5% of $5,000). By June 15, another $25 accrues, and so on.

Interest is calculated differently. It compounds daily on the unpaid balance, meaning interest accrues on top of interest. A $5,000 unpaid balance at 8% annual interest costs roughly $1.10 per day in interest alone. After one year of nonpayment, the interest alone would total about $400, plus the 6% penalty ($300) that accrued over twelve months.

The penalty stops growing once it reaches 25% of the original tax owed. Interest, however, continues to accrue for as long as the balance remains unpaid, even after the penalty caps out.

How a payment plan affects the penalty

If you set up an installment agreement with the IRS—either online through IRS.gov or by calling 1-800-829-1040—the failure-to-pay penalty rate drops from 0.5% per month to 0.25% per month. This reduction applies only while the plan is active and you make payments on time. If you miss a payment, the rate returns to 0.5% per month.

Interest continues to accrue at the full quarterly rate regardless of whether you have a payment plan. The plan does not reduce or pause interest; it only slows the growth of the penalty. A short-term extension (120 days or fewer) does not reduce the penalty rate at all—it only delays when payment is due.

The IRS offers several payment plan options: a short-term extension (no setup fee), a long-term installment agreement (setup fee ranges from $31 to $225 depending on the method), and an offer in compromise (which requires a separate application and is rarely accepted). Each has different terms and affects how quickly penalties and interest accumulate.

Penalties for state tax debt

State penalties vary significantly. California charges 5% of unpaid tax per month (capped at 25%), plus interest at 10% annually. New York charges 5% per month for failure to pay (capped at 25%), plus interest at 7.5% annually. Texas has no state income tax, so there is no state penalty to owe. Florida, Washington, and several other states also have no income tax.

Some states charge a flat penalty (a fixed dollar amount) rather than a percentage. Others charge both a percentage penalty and a separate interest rate. A few states offer a small reduction in the penalty rate if you set up a payment plan, similar to the federal system, but this is not universal.

To find your state's exact penalty and interest rate, visit your state's department of revenue website or call their taxpayer assistance line. The rate may also depend on whether you filed late, paid late, or both.

What happens if you cannot pay by the deadline

If you know you cannot pay by April 15, file your return anyway. Filing on time stops the failure-to-file penalty from accruing, even if you cannot pay the tax owed. You will still owe the failure-to-pay penalty and interest, but you avoid the larger failure-to-file penalty (5% per month).

Pay as much as you can by the deadline, even if it is a partial payment. The penalty and interest apply only to the unpaid balance, so paying $1,000 of a $5,000 bill reduces the amount subject to penalties going forward.

Request a short-term extension online at IRS.gov (under "Payment Plans") or by phone at 1-800-829-1040. A 120-day extension costs nothing and gives you time to arrange payment without additional penalties accruing during that period. After 120 days, if you still cannot pay, you can set up a long-term installment agreement.

How to calculate what you owe in penalties and interest

The IRS calculates penalties and interest automatically on your account. You can see the current balance, including penalties and interest, by logging into your IRS account at IRS.gov or by calling 1-800-829-1040 with your Social Security number and tax return information ready.

To estimate penalties yourself: multiply your unpaid tax by 0.5% for each full month past the deadline (or 0.25% per month if you have an active payment plan). Stop multiplying once the total reaches 25% of the original tax. Then add interest by multiplying the unpaid balance by the current quarterly interest rate (8% for 2024), divide by 365, and multiply by the number of days unpaid.

This calculation is approximate because interest compounds daily and the IRS rounds to the nearest dollar. The IRS's own calculation, shown on your account transcript, is the authoritative figure. Request a transcript by mail (Form 4506-C) or download it instantly from IRS.gov if you have an online account.

Penalties may be reduced or removed in certain situations

The IRS can remove or reduce penalties if you show reasonable cause—meaning you made a good-faith effort to pay but faced circumstances beyond your control. Examples include serious illness, death in the family, fire or natural disaster, or reliance on incorrect advice from a tax professional. Simply forgetting to pay or running short on money does not may have access to.

To request penalty relief, call the IRS at 1-800-829-1040 and explain your situation, or file Form 843 (Claim for Refund and Request for Abatement) by mail. Include documentation of the hardship (medical records, death certificate, insurance claim, etc.). The IRS reviews each request individually and may grant full or partial relief.

First-time penalty abatement is a one-time automatic relief available if you have no penalties in the prior three years and you file and pay on time going forward. You do not need to prove reasonable cause; you only need to meet the may be able to access criteria. Ask about this when you call the IRS.

Frequently Asked Questions

Does the penalty stop growing if I set up a payment plan?

No, the penalty continues to accrue, but at a slower rate. With a payment plan, the failure-to-pay penalty drops from 0.5% per month to 0.25% per month. Interest continues at the full quarterly rate (currently 8% annually) regardless of whether you have a plan. The plan only slows penalty growth; it does not stop it.

What is the difference between the failure-to-file penalty and the failure-to-pay penalty?

The failure-to-file penalty (5% per month, capped at 25%) applies if you do not file your return by the deadline. The failure-to-pay penalty (0.5% per month, capped at 25%) applies if you file but do not pay the tax owed. If both apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty, so you pay the higher of the two, not both in full.

Can the IRS remove the penalty if I have a good reason for not paying?

Yes, if you show reasonable cause—serious illness, death, disaster, or reliance on professional advice. You must request relief by calling 1-800-829-1040 or filing Form 843 with supporting documentation. First-time penalty abatement may also apply if you have no prior penalties and meet other criteria.

Does interest stop accruing if I set up a payment plan?

No. Interest continues to compound daily on the unpaid balance at the current quarterly rate, regardless of whether you have a payment plan. The plan reduces the penalty rate but does not affect interest. Interest stops accruing only when the full balance is paid.

How do I find out exactly how much I owe in penalties and interest?

Log into your IRS account at IRS.gov, call 1-800-829-1040, or request a transcript by mail using Form 4506-C. Your IRS account shows the current balance, including all penalties and interest calculated to the present date. This is the authoritative figure; do not rely on estimates.