Three charges, three different rules
People often speak of penalties and interest as one thing. They are charged under different rules, they stop for different reasons, and the IRS has very different discretion over each. Sorting your balance into tax, penalties and interest is what tells you which kind of relief is worth asking for.
| Charge | Rate | Maximum | What reduces it |
|---|---|---|---|
| Failure to file | 5% of the unpaid tax per month or part of a month the return is late | 25% | Filing; penalty relief |
| Failure to pay | 0.5% of the unpaid tax per month or part of a month | 25% | Paying; 0.25% during an approved payment plan; penalty relief |
| Failure to pay after a levy notice | 1% per month if the tax is not paid within 10 days of a notice of intent to levy | 25% overall | Paying or arranging a plan before that notice |
| Interest | Federal short-term rate plus 3 percentage points, compounded daily; 7% for the fourth quarter of 2026 | None | Paying the balance. It is removed only with a penalty it was charged on, or for IRS error or delay |
Filing late costs ten times more than paying late
The monthly failure-to-file rate is ten times the failure-to-pay rate. That is the reason the IRS tells people to file by the due date even when they cannot pay: a return filed with nothing paid stops the larger penalty at once.
When both penalties apply in the same month, the IRS reduces the failure-to-file penalty by the failure-to-pay amount, so the two together come to 5% for that month: 4.5% for filing late and 0.5% for paying late. The failure-to-file penalty reaches its maximum after five months. The failure-to-pay penalty keeps running after that.
There is also a floor. If a Form 1040 is more than 60 days late, the minimum failure-to-file penalty for returns due after December 31, 2025 is $525 or 100% of the tax owed, whichever is less. The figure was $510 for returns due in 2025.
Illustrative example. A return showing $10,000 of unpaid tax is filed three months late, and the tax is paid twelve months after the due date. Failure to file: 4.5% a month for three months, or $1,350. Failure to pay: 0.5% a month for twelve months, or $600. Penalties total $1,950 before interest, and $1,350 of that would have been avoided by filing by the due date.
How interest works
Interest is not a penalty. It is charged on unpaid tax from the original due date of the return, and it is also charged on penalties. The rate is set every quarter at the federal short-term rate plus 3 percentage points. For 2026 it was 7% in the first quarter, 6% in the second, and 7% in the third and fourth.
Because it compounds daily and has no cap, interest becomes the larger charge on a balance that stays unpaid for a long time. Penalties stop at 25% each. Interest does not stop until the balance is paid or the collection period ends.
- An extension of time to file is not an extension of time to pay. Interest runs from the original due date
- A payment plan does not reduce the interest rate
- Currently not collectible status does not stop interest
- Paying part of the balance early reduces the amount interest is charged on
What a payment plan changes
One part of the Fresh Start era rules lowers the cost of paying over time. If you are an individual who filed the return by its due date and you have an approved payment plan, the failure-to-pay penalty drops from 0.5% to 0.25% per month for as long as the plan is in effect.
The reduced rate has conditions. It applies to individuals, it requires the return to have been filed timely, and it lasts only while the plan is in good standing. It does not apply in hardship status, where the IRS states that penalties and interest continue to accrue. The Simple Payment Plan guide covers how to set a plan up.
| Situation | Monthly rate |
|---|---|
| Unpaid tax, no arrangement | 0.5% |
| Approved payment plan, individual who filed by the due date | 0.25% |
| Not paid within 10 days of a notice of intent to levy | 1% |
| Qualifies for the Automatic Exemption from Penalty | Not assessed |
What can remove each charge
Penalties can be removed. Interest on the tax almost never can. That is the practical reason to deal with a balance early.
- Automatic relief for a clean record: for 2025 returns and later, the Automatic Exemption from Penalty means the failure-to-file, failure-to-pay and failure-to-deposit penalties are not assessed if you filed and paid timely for the three prior years
- First Time Abate: for earlier years, the same three penalties can be removed on request for one period if the three prior years are clean
- Reasonable cause: relief based on what happened, such as a serious illness, a disaster or an inability to get records. Lack of funds alone does not qualify
- Statutory exception: the third kind of relief the IRS lists, for specific situations written into the tax law
- Interest on a removed penalty: when a penalty is removed, the IRS automatically removes the interest that was charged on it
- Interest on the tax: stays, unless it built up because of an unreasonable IRS error or delay
Reading your own balance
Your IRS online account shows the balance for each year. The account transcript goes further and lists each penalty and interest charge with its date, which is what you need to see whether relief has already been applied and how much of the balance is penalty.
- 1.Sign in to your IRS online account and note the balance for each tax year
- 2.Open the account transcript for each year and find the lines for penalties and interest. IRS transcripts explained shows how to read them
- 3.Check whether the return was filed by its due date, since that decides the reduced plan rate
- 4.Check the three years before each penalty year for late filings or penalties
- 5.Compare the total with the key figures for 2026 to see which payment option you fall under
Where we come in
We read the account transcripts for every open year and separate the balance into tax, penalties and interest, so you can see what relief could remove and what it could not. We also prepare unfiled returns, which stops the largest penalty from growing. A first-time penalty relief request is often a phone call you can make yourself. We give you a scope and a price in writing before anything starts. See tax resolution for the scope.
Figures on this page were checked against the IRS and Massachusetts sources listed alongside on October 1, 2026. They change — confirm the current amount before relying on one.
General information for owner-led businesses, not advice for your specific situation. Tax and accounting rules change, and how they apply depends on facts particular to your business. Talk to us — or to another qualified professional — before acting on anything here.
