Interest & Penalties for Back Taxes Owed to the IRS

The IRS charges a penalty for failure to file of 5 percent of your unpaid tax amount for every partial or full month past the tax due date. The failure-to file-penalty won’t go over 25 percent of the tax amount due. Waiting more than 60 days past the tax due date will result in a penalty of $135 or 100 percent of the unpaid tax, whichever is smaller.

Interest will accrue for back taxes owed to the IRS. The IRS sets interest rates equal to the federal short-term rate plus 3 percent, compounded daily. The IRS adjusts the interest rate every three months to keep it current. The penalty for filing your return on time but not paying your total tax due is 0.5 percent for each partial or full month until you pay your taxes in full, up to 25 percent, until you finish paying your taxes completely. If the IRS issues a notice of intent to levy, and you allow 10 days to go by, the interest rate rises to 1 percent.

Sometimes taxpayers have failure-to-file and failure-to-pay penalties simultaneously. When this happens, the IRS combines the penalties to 5 percent (4.5 percent for late filing and 0.5 percent for late payment) for every partial or full month, not exceeding 25 percent. After 60 days without filing, the minimum penalty will be $135 or 100 percent of the tax due, whichever is less. If five months go by without payment, the failure-to-pay penalty will accrue until it reaches 25 percent.

The IRS has options for taxpayers unable to pay taxes. You can apply for an installment agreement to make smaller tax payments over time as long as you have filed your tax return. Interest and penalties will accrue during an installment agreement. You can also request an offer in compromise to settle your tax debt for less than you owe. The IRS charges an application fee, but you might get this waived if you meet qualifications. You also might request that the IRS delay collection, which could give you more time to pay your debt.

The IRS offers some taxpayers penalty relief. If you meet qualifications for unemployed status and income, you can receive a six-month grace period from failure-to-pay penalties. File Form 1127A to apply for penalty relief.