Tax Debt Penalties and Interest

Last updated on December 5, 2022

Tax debt that remains unpaid will grow because the IRS charges interest and penalties on unpaid debt. Even after a taxpayer has qualified for a payment plan and has started to repay the tax debt, the interest and penalties keep accumulating on the amount that remains to be paid. Interest and penalties only stop with the full payment of the tax debt amount.

To avoid the accumulation of penalties and interest, taxpayers must try to pay their tax debt as soon as is reasonably possible. Even if they cannot pay the entire amount in a single payment, they must ensure that they pay as much as they can in installments so that the entire tax debt amount is paid faster. If a tax debt is left unpaid for years, it is the penalties and interest that will substantially increase the total tax debt amount.

Taxpayers can explore reduction of penalty when seeking resolution of tax debt. To qualify for penalty reduction or removal, taxpayers must have a ‘reasonable cause’ for the non-compliance, the failure to file or pay taxes. A ‘reasonable cause’ is one where the circumstances that led to the non-compliance were beyond the control of the taxpayer.

Some events that the IRS accepts as a ‘reasonable cause’ include death, divorce, critical health problem, theft of funds or documents and natural disasters. If the IRS can be convinced that the reason for non-compliance was unexpected and beyond the control of the taxpayer, the IRS will either reduce the penalties charged or remove them altogether.