IRS interest and penalties are separate charges that both start running from your return’s original due date, and while the agency has broad authority to waive penalties through First-Time Abate or reasonable cause, it has almost no discretion to forgive interest. For 2026, the underpayment interest rate was 7% annually in the first quarter and 6% in the second, compounded daily. Knowing which charge is which, and where you actually have leverage, is what makes the difference between paying the full bill and getting a meaningful portion knocked off.
The Penalties the IRS Charges Most Often
Four penalties account for most of what taxpayers see on their notices. Each has its own trigger, its own rate, and its own cap.
Failure to File
The failure-to-file penalty is 5% of your unpaid tax for each month or partial month your return is late, capped at 25%. If the return is more than 60 days late, the minimum penalty jumps to the lesser of $525 or 100% of the tax you owe for returns required to be filed in 2026.1Internal Revenue Service. Failure to File Penalty That floor is inflation-adjusted each year. The rate is steep on purpose: the IRS wants the return in hand even when you can’t pay. Filing on time with no payment is almost always better than not filing at all.
An extension of time to file does not extend your time to pay. If you extend and then don’t pay by the original due date, the failure-to-pay penalty starts accruing immediately.
Failure to Pay
The failure-to-pay penalty is 0.5% of unpaid tax per month, also capped at 25%. It starts the day after the payment deadline. When both penalties apply in the same month, the failure-to-file amount is reduced by the failure-to-pay amount, so the combined charge never exceeds 5% for that month.2Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
Accuracy-Related and Fraud Penalties
These target errors on the return rather than lateness. The accuracy-related penalty is a flat 20% of any underpayment caused by negligence, a substantial understatement of income, or certain other inaccuracies. For individuals, a “substantial understatement” means the amount underreported exceeds the greater of 10% of the tax that should have been shown on your return or $5,000. Taxpayers claiming the qualified business income deduction face a tighter 5% trigger.3Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Fraud is different. If the IRS determines that any part of an underpayment resulted from fraud, the penalty is 75% of the fraudulent portion. Once the IRS shows fraud in any part, the entire underpayment is presumed fraudulent unless you prove otherwise by a preponderance of the evidence.4Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty The accuracy and fraud penalties can’t both apply to the same dollar, but the fraud penalty is nearly four times larger.
Estimated Tax Underpayment
If you earn income that isn’t subject to withholding, you’re generally expected to make quarterly estimated payments. Fall short and the IRS charges a penalty based on the interest rate in effect for each quarter you were behind.5Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax You can avoid it entirely by meeting any of these safe harbors:
- Your balance after withholding and refundable credits is under $1,000.
- You paid at least 90% of what you owe for the current year.
- You paid at least 100% of the tax shown on last year’s return.
The 100% threshold rises to 110% if your prior-year adjusted gross income exceeded $150,000, or $75,000 if married filing separately.6Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty That higher-income rule is what trips up self-employed taxpayers most often, because a strong prior year sets a surprisingly high safe harbor for the current one.
Dishonored Payment
A check that bounces or an electronic payment that fails costs 2% of the payment amount. For payments under $1,250, the penalty is capped at $25 or the payment amount, whichever is less.7Office of the Law Revision Counsel. 26 USC 6657 – Bad Checks The penalty is waived if you can show reasonable cause to believe the payment would clear. A failed payment also means the underlying balance was never paid, so failure-to-pay charges and interest continue as if the payment never happened.
How Interest Works, and Why It’s Harder to Fight
Interest runs on its own clock. The IRS charges interest on any unpaid balance, including assessed penalties, from the original due date of the return until the debt is fully paid.8Internal Revenue Service. Interest The rate equals the federal short-term rate plus three percentage points and resets quarterly.9Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest For Q1 2026, the individual underpayment rate was 7% annually; it dropped to 6% for Q2 2026.10Internal Revenue Service. Internal Revenue Bulletin 2026-8
Interest compounds daily, so each day’s charge is calculated on the prior day’s balance plus accumulated interest. Over months or years, that adds up. A $10,000 debt at 7% adds more than the flat $700 you might expect over a year because of the daily compounding.
Here’s the practical takeaway. The IRS can waive penalties for a long list of reasons but has almost no authority to forgive interest. Interest is treated as the government’s cost of not having the money it was owed, and it’s reduced only in narrow circumstances such as unreasonable IRS delay causing part of the accrual. If you owe both, put your effort into abating the penalties. That’s where relief actually exists.
Cut the Penalty in Half with a Payment Plan
If you can’t pay in full, an approved installment agreement does more than buy time. When you filed your return on time and have an approved plan in place, the failure-to-pay penalty drops from 0.5% per month to 0.25%.11Internal Revenue Service. Failure to Pay Penalty2Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax Interest keeps running on what you owe, but the penalty reduction alone can save real money on a large balance.
Two main options exist. A short-term plan gives you up to 180 days to pay in full, is available if you owe less than $100,000 in combined tax, penalties, and interest, and has no setup fee. A long-term installment agreement spreads monthly payments over a longer period and is available online if you owe $50,000 or less. Setup fees for long-term agreements range from $22 for an online direct debit agreement up to $178 if you apply by phone, mail, or in person without direct debit. Low-income taxpayers, those with adjusted gross income at or below 250% of the federal poverty level, can have the setup fee waived or reimbursed.12Internal Revenue Service. Payment Plans; Installment Agreements
You can apply online through your IRS account, by phone at 800-829-1040, or by mailing Form 9465. For taxpayers who genuinely cannot pay what they owe, the IRS also accepts offers in compromise that settle the debt for less than the full balance, though you must have filed all required returns, made all required estimated payments, and not be in an open bankruptcy proceeding to qualify.13Internal Revenue Service. Offer in Compromise
Getting Penalties Removed
Two main paths exist for abatement: an administrative waiver called First-Time Abate, and a reasonable cause argument. The right choice depends on your compliance history.
First-Time Abate
This is the simplest route. You qualify if you have a clean compliance history for the three tax years before the penalty year, which means you filed all required returns on time, didn’t owe any penalties during that period (or had them removed for a reason other than First-Time Abate), and have paid or arranged to pay any tax currently due.14Internal Revenue Service. Administrative Penalty Relief You don’t need to explain why you were late or provide documentation. The IRS checks your record and grants or denies based on what it sees.
Reasonable Cause
If First-Time Abate isn’t available, you’ll need to show reasonable cause. The standard is that you exercised ordinary care and prudence but still couldn’t file or pay on time. Circumstances the IRS takes seriously include serious illness or hospitalization, the death of an immediate family member, destruction of records by fire or natural disaster, and other events genuinely beyond your control. Documentation matters: hospital records, insurance claims, death certificates, or specific evidence of what prevented compliance.
Relying on a tax professional’s bad advice can qualify as reasonable cause in limited situations, mainly for accuracy-related penalties. The IRS looks at whether you gave the advisor complete and accurate information and whether your reliance was reasonable.15Internal Revenue Service. 20.1.1 Introduction and Penalty Relief For filing and payment penalties, this argument is much harder to win, because the IRS treats the obligation to file and pay on time as one you can’t delegate.
How to Actually Request Abatement
For First-Time Abate, the fastest route is calling the toll-free number on your most recent IRS notice. The representative can often check your compliance history and process the removal during the call. You don’t need to use the phrase “First-Time Abate”; asking for penalty relief is enough.14Internal Revenue Service. Administrative Penalty Relief
For reasonable cause, submit a written request. You can use Form 843 (Claim for Refund and Request for Abatement) or write a letter. Form 843 asks for your Social Security number or employer identification number, the tax period, the type of tax, and the specific penalty amount you’re contesting.16Internal Revenue Service. Form 843, Claim for Refund and Request for Abatement Attach the IRS notice showing the penalty and whatever documentation backs up your claim. Mail the package to the service center address on your penalty notice, and use certified mail so you have proof of the date it was sent.
The IRS responds with a written determination approving, partially approving, or denying your request. An approval comes with an adjusted account statement. A denial explains the reasons and outlines your appeal rights.
Appealing a Denial
A denial isn’t final. You generally have 30 days from the date of the rejection letter to request a conference with the IRS Independent Office of Appeals.17Internal Revenue Service. Penalty Appeal Appeals officers are separate from the employees who made the original decision and have authority to settle based on the hazards of litigation, meaning they weigh whether the IRS would likely win in court, not just whether it followed its own rules.
To appeal, you must already have a penalty assessment, a submitted written abatement request, and a written denial. Your appeal should address the specific reasons the IRS gave and add any evidence that strengthens your case. Check the rejection letter for the exact deadline and filing instructions, because some situations have different timeframes.
The Deadlines on Both Sides
The IRS doesn’t have unlimited time to collect. The collection statute expiration date gives the IRS 10 years from the date your tax was assessed to collect the balance, including penalties and interest. After that, the debt expires. Certain actions pause the clock: filing for bankruptcy, submitting an offer in compromise, requesting a collection due process hearing, and living outside the country for six months or more all suspend the 10-year period.18Internal Revenue Service. Time IRS Can Collect Tax
Your own deadline runs the other direction. If you’ve already paid a penalty and later realize it should have been abated, you must file a refund claim within three years from when you filed the return or two years from when you paid the tax, whichever is later.19Office of the Law Revision Counsel. 26 USC 6511 – Limitations on Credit or Refund Miss it and the money is gone regardless of the merits. If you paid penalties you think were wrong, don’t sit on the claim.