How Much Is a Tax Penalty? IRS Rates, Interest, and Relief

A tax penalty from the IRS is charged as a percentage of the tax you owe, and the size depends on what you did wrong. Filing your return late costs 5% of the unpaid balance for each month it’s late, capped at 25%. Paying late is gentler at 0.5% per month, also capped at 25%. Get the numbers wrong through carelessness and the penalty is a flat 20% of the understatement. On top of any penalty, interest runs on the unpaid tax at 6% annually for the quarter beginning April 1, 2026, with no cap and daily compounding.¹

Filing Late: 5% Per Month, Up to 25%

The failure-to-file penalty is the most expensive of the common ones. It’s 5% of your unpaid tax for each month or partial month the return is late, and it stops climbing once it hits 25% of what you owe.² The cap is reached after five months. Owe $10,000 and file six months late? The penalty is $2,500 before interest.

If your return is more than 60 days late, a minimum kicks in. For returns due after December 31, 2025, that floor is $525 or 100% of the unpaid tax, whichever is smaller.³ So a $200 balance filed two months late becomes a $200 penalty. The floor is adjusted for inflation periodically.

One thing that surprises people: the penalty is calculated on unpaid tax, not on total tax. If withholding already covered your bill, or you’re due a refund, the failure-to-file penalty is zero no matter how late you are.⁴ You still need to file to claim the refund, but there’s no charge for the delay.

Filing an extension by the original deadline removes this penalty. It does not remove the payment penalty, which is where a lot of people get burned. An extension to file is not an extension to pay.⁵

Paying Late: 0.5% Per Month, Up to 25%

If you filed but didn’t pay in full, the IRS charges 0.5% of the unpaid balance for each month it stays outstanding, up to 25%.² That’s one-tenth the monthly rate of the filing penalty, which is why the standing advice is to always file on time even if you can’t pay.

The 0.5% rate moves in two directions. Set up an IRS installment agreement after filing on time and it drops to 0.25% per month while the plan is in place. Ignore a notice of intent to levy and it doubles to 1% per month.²

When Both Penalties Hit at Once

Owe both penalties in the same month and the IRS doesn’t fully stack them. The failure-to-file rate is reduced by the failure-to-pay rate for any month both apply, so the filing penalty runs at 4.5% and the payment penalty at 0.5%, keeping the combined charge at 5% per month.²

That combined rate only runs for five months, because the filing penalty maxes out at 25%. After that the payment penalty keeps ticking along at 0.5% per month until it reaches its own 25% ceiling. Total maximum for both: 47.5% of the original tax owed. Interest is separate and keeps running.

Underpaying Estimated Tax

If you’re self-employed or have income that isn’t fully covered by withholding, the IRS expects quarterly estimated payments. Miss them and the penalty is calculated by applying the IRS underpayment interest rate to each quarter’s shortfall for the period it stayed unpaid.⁶ That rate is 6% for the quarter starting April 2026.¹

You can skip the penalty entirely by hitting one of the safe harbors:

Your return shows less than $1,000 in tax due after withholding and credits.⁶
You paid at least 90% of the tax shown on this year’s return through withholding or estimated payments.
You paid at least 100% of the tax shown on last year’s return, which is easier to plan around when income swings.
If your prior-year AGI was over $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110%.⁷

The IRS can also waive the estimated tax penalty if you retired after age 62 or became disabled during the tax year or the year before, and the underpayment came from reasonable cause rather than neglect.⁸ Casualties and federally declared disasters can also qualify.

Getting the Numbers Wrong: 20% Accuracy Penalty

Timing penalties punish being late. Accuracy penalties punish being wrong. The IRS imposes a flat 20% penalty on any underpayment caused by negligence, careless disregard of the rules, or a substantial understatement of income.⁹

A “substantial understatement” for individuals means the gap between what you reported and what you should have reported is more than the greater of 10% of the correct tax or $5,000.⁹ Negligence covers a wider range: missing records, deductions you can’t back up, ignoring income the IRS already knows about from a 1099. The standard is whether you made a reasonable effort to get things right, not whether you meant to cheat.

Fraud: 75%

If the IRS determines an underpayment was fraudulent rather than merely careless, the penalty is 75% of the portion of the underpayment attributable to fraud.¹⁰ The IRS has to prove fraud in the first place, but once it establishes that any part of the underpayment was fraudulent, the whole underpayment is presumed fraudulent unless the taxpayer shows otherwise by a preponderance of the evidence. Fraud and the 20% accuracy penalty can’t apply to the same dollars.

Interest on Top of Everything

Interest isn’t a penalty in the technical sense, but it often costs more than the penalties do because it has no ceiling and it compounds daily. The IRS charges interest on unpaid tax from the original due date of the return until you pay in full.¹¹

The rate resets each quarter at the federal short-term rate plus three points. For the quarter beginning April 1, 2026, it’s 6%.¹ Interest also accrues on unpaid penalties. If you don’t pay a penalty within 21 calendar days of the IRS notice demanding it (10 business days when the amount is $100,000 or more), interest starts running on the penalty itself.¹¹ Interest on tax plus interest on penalties is why old IRS debts grow so fast.

How to Get a Penalty Reduced or Removed

Penalties aren’t necessarily final. The two main routes to relief are first-time abatement and reasonable cause.

First-Time Abatement

If you’ve filed all required returns for the past three years and haven’t been hit with penalties during that stretch, you likely qualify for the IRS’s First-Time Abate program.¹² It’s an administrative waiver, so you don’t have to prove a disaster or hardship. A clean recent record is the whole requirement. You can request it by calling the IRS, writing a letter, or filing Form 843.

Reasonable Cause

If first-time abatement isn’t available, reasonable cause is the fallback. The IRS reviews these case by case.¹³ Circumstances that tend to succeed: fires or natural disasters that destroyed your records, serious illness or death in your immediate family, and system failures that blocked timely electronic filing.

Circumstances that generally don’t work: not knowing about the filing requirement, running short on money, or blaming your tax preparer. The IRS treats you as responsible for meeting your own obligations even when you hire help. For accuracy penalties, though, the IRS does weigh the complexity of the issue and whether you sought competent professional advice.¹³

State Penalties Are Separate

Everything above is federal. Most states with an income tax charge their own late-filing and late-payment penalties, with rates and caps that vary. They apply on top of anything the IRS charges, so check your state tax agency for the specific numbers that apply to you.

1
Internal Revenue Service. Internal Revenue Bulletin 2026-08
2
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
3
Internal Revenue Service. Failure to File Penalty
4
Internal Revenue Service. Failure to Pay Penalty
5
Internal Revenue Service. IRS Reminds Taxpayers an Extension to File Is Not an Extension to Pay Taxes
6
Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax
7
Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax
8
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
9
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
10
Office of the Law Revision Counsel. 26 U.S. Code 6663 – Imposition of Fraud Penalty
11
Office of the Law Revision Counsel. 26 USC 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax
12
Internal Revenue Service. Administrative Penalty Relief
13
Internal Revenue Service. Penalty Relief for Reasonable Cause