Penalties and Interest on Amended Returns: Abatement and Payment Options

If you file a 1040-X that increases your tax, expect to pay interest going back to the original filing deadline and a monthly failure-to-pay penalty on the unpaid balance, and in some cases an additional 20 percent accuracy penalty. That’s the shape of penalties and interest on amended returns: the tax itself is only part of what you’ll owe, because the IRS treats the extra liability as money that should have been paid on the original due date, not the day you found the mistake.

Interest Runs From the Original Due Date

Interest on the additional tax starts the day after the original return was due and keeps running until the balance is paid in full.¹ An extension to file doesn’t help. An extension gives you more time to submit paperwork, not more time to pay. If your 2023 return was due April 15, 2024, interest on any shortfall began accruing April 16, 2024, no matter when you discovered the error.

That interest compounds daily.² The annual rate is the federal short-term rate plus three percentage points, recalculated every quarter.³ For the first quarter of 2026, the individual underpayment rate is 7 percent; for the second quarter, it drops to 6 percent.⁴

The catch most people don’t expect: the IRS generally cannot waive interest on an underpayment, even if you had a genuinely good reason for the mistake. Interest abatement is limited to narrow situations, such as unreasonable delays caused by IRS employees performing internal administrative tasks, or the IRS’s failure to contact you about a known liability within 36 months of your filing.⁵ If the underpayment was your error, interest is the cost of holding the government’s money, and the only way to stop the meter is to pay the balance.

The Failure-to-Pay Penalty

On top of interest, the IRS adds a failure-to-pay penalty of 0.5 percent of the unpaid tax for each month or partial month the balance remains open, capped at 25 percent.⁶ On a $5,000 shortfall, that’s $25 a month. At 0.5 percent monthly, the penalty takes 50 months to reach its ceiling, at which point it equals a quarter of the tax.

Two things soften this penalty. First, unlike interest, it can be waived for reasonable cause. Second, if you enter an approved installment agreement, the monthly rate drops from 0.5 percent to 0.25 percent for any month covered by the agreement.⁷ That’s one of the real financial benefits of getting on a formal plan rather than letting the balance drift.

If the original return was itself filed late, a separate failure-to-file penalty runs at 5 percent per month. When both apply for the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty, so the combined monthly rate is 5 percent rather than 5.5.⁶ Most 1040-X filers had a timely original return, so only the failure-to-pay side is in play.

Accuracy-Related Penalty

When the underpayment traces back to negligence or a substantial understatement of income tax, the IRS can add a flat 20 percent penalty on the portion of the underpayment tied to that conduct.⁸ This is on top of interest and the failure-to-pay penalty.

Negligence means you didn’t make a reasonable effort to follow the tax rules, whether by neglecting recordkeeping basics or disregarding a rule you should have known. Substantial understatement is a defined threshold: for individuals, the understatement has to exceed the greater of $5,000 or 10 percent of the tax that should have appeared on the original return.⁸ If you claimed the Section 199A qualified business income deduction, the 10 percent threshold falls to 5 percent, so it triggers more easily. The $5,000 figure is fixed by statute and doesn’t adjust for inflation.

Voluntarily filing a 1040-X to fix your own mistake works in your favor. The IRS can waive an accuracy penalty entirely when the taxpayer shows reasonable cause and good faith.⁹ Catching and correcting the error before the IRS finds it is strong evidence of good faith. The agency also weighs the complexity of the issue, your effort to report correctly, and whether you sought professional advice.¹⁰ A position with a reasonable basis in law, even if ultimately wrong, can also support a defense.

The much harsher civil fraud penalty of 75 percent applies only when the IRS proves, by clear and convincing evidence, that the underpayment was due to intentional wrongdoing such as fabricated deductions, hidden income, or false records.¹¹¹² An honest mistake, even a large one, doesn’t qualify. For someone amending to correct a genuine error, this penalty isn’t a realistic concern.

Getting Penalties Reduced or Removed

Interest almost never comes off. Penalties are a different story, and two paths are worth pursuing.

First-Time Abate

If you have a clean compliance history, the IRS may waive the failure-to-pay penalty under its administrative First-Time Abate policy. To qualify, you must have filed all required returns for the three tax years before the one at issue, and you cannot have been assessed penalties during that three-year window, unless a prior penalty was removed for a reason other than First-Time Abate.¹³ There’s no dollar cap on what can be abated this way. Request it by calling the IRS or by responding in writing to a penalty notice.

Reasonable Cause

If First-Time Abate doesn’t fit, you can still ask for relief by showing you exercised ordinary care and were nevertheless unable to pay on time. The IRS evaluates these requests case by case. Circumstances that tend to support relief include natural disasters, serious illness, inability to obtain records, and system issues that delayed an electronic payment.¹⁰ What generally doesn’t work: blaming your preparer, claiming ignorance of the law, or simply not having the money. Lack of funds alone isn’t reasonable cause, though it can contribute when combined with other circumstances.

The same reasonable cause and good faith standard applies to accuracy penalties under Section 6662.⁹ Proactively filing a 1040-X to fix an error you spotted yourself is exactly the sort of behavior that supports abatement.

Pay What You Can, When You File

Every day the balance sits, interest compounds. If you submit the 1040-X without payment, the IRS processes the return first and later sends a notice with the calculated interest and penalties, and the meter runs the whole time. Paying the estimated amount when you file the amendment, rather than waiting for the notice, is almost always cheaper.

Installment Agreements

When the full amount isn’t possible, the IRS offers payment plans that stop aggressive collection and cut the failure-to-pay penalty rate in half. A short-term plan gives you up to 180 days to pay with no setup fee. A long-term installment agreement spreads payments over monthly installments.¹⁴

Setup fees for long-term plans depend on how you apply and how you’ll pay:

Direct debit from a bank account: $22 online, $107 by phone or mail.
Other payment methods: $69 online, $178 by phone or mail.
Low-income taxpayers with adjusted gross income at or below 250 percent of the federal poverty level: setup fee waived for direct debit plans; $43 for other methods, which may be reimbursed.¹⁴

Online application is available if you owe $50,000 or less in combined tax, penalties, and interest for a long-term plan, or less than $100,000 for a short-term plan. Interest and penalties keep accruing during an installment agreement, but the failure-to-pay penalty runs at 0.25 percent per month instead of 0.5.⁷ Processing an amended return typically takes 8 to 12 weeks, and sometimes up to 16, so the compounding window is real.¹⁵

If Your Amendment Produces a Refund Instead

Not every 1040-X increases what you owe. If you overpaid, the IRS owes the excess plus interest, generally running from the due date of the original return (or the date you paid, if later) to the date the refund is issued. If the IRS processes the amendment and pays the refund within 45 days of receiving the claim, no interest accrues during that window.

The refund claim itself has a hard deadline. You must file the amended return by the later of three years from when you filed the original return, or two years from when you paid the tax.¹⁶ Miss both windows and the refund is forfeited, no matter how plainly you overpaid. The refund amount is also capped by when you file: within the three-year window, it’s limited to what you paid during the three years before the claim plus any extensions; within the two-year window, to what you paid in those two years.

1
Office of the Law Revision Counsel. 26 USC 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax
2
Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
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Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest
4
Internal Revenue Service. Quarterly Interest Rates
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Office of the Law Revision Counsel. 26 USC 6404 – Abatements
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Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
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Internal Revenue Service. Failure to Pay Penalty
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Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
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Office of the Law Revision Counsel. 26 USC 6664 – Definitions and Special Rules
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Internal Revenue Service. Penalty Relief for Reasonable Cause
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Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
12
Internal Revenue Service. IRM 25.1.6 – Civil Fraud
13
Internal Revenue Service. Administrative Penalty Relief
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Internal Revenue Service. Payment Plans Installment Agreements
15
Internal Revenue Service. Amended Return Frequently Asked Questions
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Internal Revenue Service. Time You Can Claim a Credit or Refund