Quick answer

The IRS charges separate penalties and interest when you don’t pay taxes on time. The two most common penalties are the failure-to-file penalty (usually 5% of unpaid tax per month) and the failure-to-pay penalty (usually 0.5% per month). Interest is computed daily on the unpaid balance (including penalties) at a rate equal to the federal short-term rate plus 3 percentage points and compounds daily; the IRS updates the interest rate quarterly (IRS, Penalties; IRS, Interest and Penalties).

How the penalties work

  • Failure-to-file (FTF): Generally 5% of the unpaid tax for each month (or part of a month) the return is late, up to a maximum of 25% (IRS, Penalties). If the return is more than 60 days late, there is a minimum penalty.
  • Failure-to-pay (FTP): Generally 0.5% of unpaid tax for each month (or part of a month) the tax is unpaid, up to 25% of the unpaid tax (IRS, Penalties).
  • Combined rule: If both FTF and FTP apply in the same month, the combined penalty is generally 5% per month (the larger FTF rate) until the FTF penalty reaches its limit; the FTP penalty can continue afterward until it reaches its own limit.
  • Reduced rate with installment agreements: If you have an approved installment agreement, the FTP penalty is often reduced to 0.25% per month while the agreement is in effect (see IRS guidance).

How interest is calculated

  • Formula and compounding: Interest is charged daily on the unpaid tax, penalties, and additional interest. The rate equals the federal short-term rate plus 3 percentage points; the IRS posts the current quarterly rates (IRS, Interest and Penalties).
  • Practical note: Because interest compounds daily and applies to penalties as well as tax, small balances can grow noticeably over time.

Examples (simple)

1) Late payment only

  • Unpaid tax: $2,000
  • FTP rate: 0.5% per month
  • Three months late penalty: $2,000 × 0.005 × 3 = $30
  • Interest: calculated daily at the applicable annual rate; roughly = principal × annual rate × days/365 (IRS uses daily compounding for the exact amount).

2) Late filing and late payment

  • Unpaid tax: $2,000
  • Three months late with no extension filed: monthly penalty typically = 5% (FTF) for up to 5 months; combined FTP is embedded into that 5% where both apply. Penalties can therefore be materially higher than FTP alone.

Who is affected

Individuals, business owners, and employers who file returns or make estimated payments late can face these charges. Interest applies to any unpaid federal tax balance until paid in full; penalties depend on the type and duration of noncompliance.

Ways to reduce or avoid penalties and interest

  • Pay as much as you can by the due date. Reducing the unpaid balance lowers both penalties and interest.
  • File your return on time even if you can’t pay the full amount. Filing limits the larger failure-to-file penalty.
  • Request an installment agreement or short-term extension to pay; approved installment agreements may lower the monthly FTP rate.
  • Request penalty relief (abatement) if you have reasonable cause or qualify for first-time penalty relief; see guidance on preparing a reasonable-cause request and available relief options (FinHelp: “How to Ask the IRS for a Penalty Abatement: Evidence That Works”, “The Complete Guide to IRS Penalty Relief Options”).

Common misconceptions

  • Filing for an extension does NOT extend the payment deadline. You still must pay by the original due date to avoid FTP penalties.
  • Interest continues to accrue even if the IRS grants penalty relief; abating penalties does not retroactively stop interest charges unless specifically addressed.

Action checklist

  1. Confirm the tax due and pay as much as possible by the due date.
  2. File returns on time to avoid higher FTF penalties.
  3. If you cannot pay, contact the IRS to set up an installment agreement or explore relief programs.
  4. If you have a strong explanation (illness, disaster, identity theft), prepare a reasonable-cause letter for penalty abatement; FinHelp has templates and evidence checklists to help.

Relevant FinHelp resources

Authoritative sources and citations

Disclaimer

This article explains general IRS rules for educational purposes and is not personalized tax advice. For guidance specific to your situation, consult a tax professional or contact the IRS.