IRS Penalties and Interest on Back Taxes

Last updated on May 8, 2023

Tax debt amounts increase every month, due to the penalties and interest the IRS charges. For each month that taxes remain unpaid after the filing date, the IRS charges 0.5% in penalty. The maximum amount of penalty the IRS can charge for a month is 25%.

Along with that, interest also keeps accumulating on the back taxes. The longer a tax debt remains unpaid, the more the debtor will need to pay to the IRS due to penalties and interest being added to it.

There are two methods to avoid IRS penalties: one is to present a “reasonable cause” to the IRS for the late payment of taxes, and the other is to resolve the tax debt case as early as possible, ideally within the first few months the tax debt is accrued. The less time you take to pay your tax debt, the less amount of both penalties and interest you will need to pay.

For reduction or removal of penalties, you will need to furnish a convincing reason for late payment. If your reason for late payment is considered “reasonable” by the IRS, they may reduce or remove penalties charged on the tax debt. Abatement of penalties does not affect the interest charged on tax debt. A “reasonable cause” can be a natural disaster, death of a family member, divorce, or other personal crisis.

As penalties and interest can substantially increase tax debt over time, it is preferable to make early efforts to resolve the debt even if you cannot pay it in its entirety.