If you’ve ever wondered why your IRS balance seems to grow faster than you can pay it down, the answer lies in how the IRS applies interest and penalties. Even a small tax debt can double in size within a few years — not because you spent more, but because the IRS adds monthly penalties and daily compounding interest.
Understanding how these charges work is key to stopping the snowball effect. This guide explains what happens when you file or pay late, how the math really adds up, and what steps you can take right now to minimize the damage.
📘 Official Resource: IRS Penalties Overview
The Failure-to-File Penalty — The Heaviest Hit
The failure-to-file penalty is one of the most expensive penalties the IRS imposes. It equals 5% of your unpaid taxes for each month (or part of a month) that your return is late, up to a maximum of 25%.
If both the failure-to-file and failure-to-pay penalties apply for the same month, the IRS caps the combined total at 5% to avoid double-charging you.
📘 Official Reference: IRS Failure-to-File Penalty
💡 Tip: Even if you can’t pay, file your tax return anyway. Filing on time prevents the 5% monthly penalty from piling up, which is the biggest cost driver for most taxpayers.
The Failure-to-Pay Penalty — Smaller but Persistent
The failure-to-pay penalty is smaller but still damaging over time. It’s typically 0.5% of the unpaid tax per month, up to a maximum of 25%.
However, the rate can change depending on your situation:
- If the IRS issues a Final Notice of Intent to Levy and you still don’t pay within 10 days, the rate increases to 1% per month.
- If you’re on an approved IRS payment plan, the rate decreases to 0.25% per month — cutting your penalty in half.
📘 Official Reference: IRS Failure-to-Pay Penalty
That means even setting up a basic Installment Agreement can immediately reduce how fast your debt grows.
Interest — The Invisible Multiplier
While penalties hit monthly, interest compounds daily on both the unpaid tax and the penalties. The interest rate changes quarterly and is calculated as the federal short-term rate plus 3%.
📘 Official Reference: IRS Interest on Underpayments
📘 Interest Rates Resource: IRS Quarterly Interest Rates
How Payments Are Applied?
When you make a payment, the IRS automatically applies it in this order:
- Tax owed
- Penalties
- Interest
Common Scenarios That Accelerate Debt Growth
- Filing late because you couldn’t afford to pay (triggering both FTF and FTP penalties)
- Ignoring IRS notices
- Understating income (leading to accuracy-related penalties of 20%)
Even honest mistakes or delays can snowball into thousands of dollars in penalties if left unaddressed.
How to Slow or Stop the Growth?
1. File All Unfiled Returns
Filing immediately stops the failure-to-file penalty from growing.
2. Set Up a Payment Plan
Entering into an IRS Payment Plan or Online Installment Agreement.
3. Make a Partial Payment
Even a small payment reduces the principal, which in turn lowers how much interest accrues daily.
4. Request Penalty Abatement
If this is your first penalty in several years, you may qualify for First-Time Penalty Abatement (FTA) — the IRS’s one-time forgiveness program.
📘 Learn more: IRS Administrative Penalty Relief
If extraordinary circumstances (like illness, disaster, or family death) caused the delay, you can request Reasonable Cause Relief instead.
📘 Reference: IRS Penalty Relief for Reasonable Cause
5. Explore Long-Term Options
If you truly can’t pay, other IRS relief programs may help:
- Offer in Compromise (OIC): Settle for less than you owe.
- Currently Not Collectible (CNC) Status: Temporarily pause collections due to hardship.
Understanding Penalty Abatement
First-Time Abatement (FTA):
- Applies to one tax period only
- You must have filed all required returns or extensions
- You must have no penalties for the previous three years
Reasonable Cause Relief:
Granted when you exercised “ordinary business care and prudence” but couldn’t meet obligations due to circumstances beyond your control (like serious illness or natural disaster).
📘 Reference: IRS Penalty Relief Options
How a Tax Attorney Can Help?
A tax attorney can analyze your IRS transcripts to pinpoint exactly how much of your balance is tax, interest, or penalties — and where you can reduce it. They can:
- File penalty abatement requests and appeals
- Negotiate affordable payment plans
- Prevent wage garnishments or bank levies
- Handle all IRS communication on your behalf
Having professional representation often speeds up relief and ensures no deadlines are missed.
Need help with a similar issue? Contact our firm today for a consultation.
IRS interest and penalties grow faster than most people realize — often turning small debts into serious financial problems. But with the right strategy, you can stop the balance from snowballing and even remove certain penalties entirely.
If your IRS balance is rising every month, contact Pelham PLLC today. Our tax attorneys help clients file overdue returns, set up payment plans, and request penalty relief to keep debt from spiraling further.
📘 Official Resource: IRS Penalties and Interest Information
FAQs
Can I get penalties removed?
Yes — through First-Time Abatement or Reasonable Cause Relief.
How long will penalties keep accruing?
Until the tax is paid in full or the 10-year collection statute expires.
How can I stop my balance from growing today?
File your return, set up an IRS Payment Plan, and request penalty relief.
Can I negotiate interest?
If your penalties are abated, any interest on those penalties is also removed.
