IRS Tax Return Penalties and Interest Explained
Failure to File Penalty
If you don’t file your tax return by the deadline (or the extended deadline, if you filed for an extension), the penalty is 5% of the unpaid tax for each month the return is late, up to a maximum of 25%. That ceiling arrives after five months.
If your return is more than 60 days late, the minimum penalty is the lesser of $510 (for 2025 returns) or 100% of the tax owed. So even if you owe $300, the minimum penalty could equal the entire balance.
Filing an extension avoids the failure-to-file penalty, but it doesn’t extend your time to pay. You still owe by April 15.
Failure to Pay Penalty
This one runs at 0.5% of your unpaid tax per month, up to 25%. It starts accruing the day after the payment deadline. If both the failure-to-file and failure-to-pay penalties apply in the same month, the combined rate is capped at 5% (the filing penalty drops to 4.5%).
The math is clear: filing on time even if you can’t pay is always better than not filing at all. The filing penalty is ten times worse per month.
Key Takeaway
Always file on time, even if you owe money you can’t pay right now. The late filing penalty is 5% per month. The late payment penalty is 0.5% per month. File first, figure out payment second.
Estimated Tax Underpayment Penalty
Self-employed individuals and people with income not subject to withholding need to make quarterly estimated tax payments. If you don’t pay enough during the year, the IRS charges an underpayment penalty calculated at the federal short-term rate plus 3 percentage points, compounded daily.
For 2025, that rate is 7%. The penalty applies to the amount of underpayment for each quarter, so it’s not just one lump calculation — it’s four separate periods.
You avoid the penalty if you paid at least 90% of the current year’s tax or 100% of last year’s tax (110% if your AGI exceeded $150,000). That safe harbor is the reason most tax planners use prior-year tax as the baseline for estimated payments.
How IRS Interest Works
Interest accrues on any unpaid tax from the original due date. The rate is set quarterly based on the federal short-term rate plus 3 percentage points — currently 7% for individual underpayments. Interest compounds daily, not monthly, which means it grows faster than the penalties themselves.
Interest cannot be abated. Unlike penalties, where you can request first-time abatement or cite reasonable cause, interest is non-negotiable. It accrues until the balance is paid in full.
Getting Penalties Removed
First-Time Abatement
If you’ve been compliant for the prior three years (filed on time, paid on time, no penalties), the IRS will waive a failure-to-file or failure-to-pay penalty under the first-time abatement policy. You don’t need to prove hardship — just a clean history. Call the IRS or submit a written request.
Reasonable Cause
If you can’t use first-time abatement, you can request relief based on reasonable cause. This requires documenting why you failed to file or pay — serious illness, natural disaster, death in the family, reliance on a professional who gave bad advice. “I forgot” and “I didn’t know” rarely work.
Penalty Abatement for Erroneous IRS Advice
If you followed written advice from the IRS that turned out to be wrong, you can request abatement under Section 6404(f). You’ll need the original letter or notice from the IRS and proof that you relied on it.
Business Return Penalties (1120S, 1065)
S corp returns (Form 1120S) and partnership returns (Form 1065) carry their own late filing penalties: $230 per partner/shareholder per month the return is late, up to 12 months. A five-member LLC that files its 1065 three months late owes $3,450 in penalties before interest. These penalties are separate from any individual tax penalties the members face on their own returns.
Frequently Asked Questions
Can the IRS waive interest on my balance?
No. Interest is required by law (IRC Section 6601) and cannot be waived or abated, even if penalties are removed. The only way to stop interest from accruing is to pay the balance.
Does filing an extension avoid penalties?
It avoids the failure-to-file penalty. It does not avoid the failure-to-pay penalty or interest. If you owe money, you need to estimate and pay by April 15 even if you file the return in October.
What happens if I just ignore an IRS penalty notice?
Penalties and interest continue accruing. The IRS will send escalating notices (CP14, CP501, CP503, CP504). Eventually they can file a federal tax lien, levy your bank account, or garnish wages. Ignoring notices makes everything worse and more expensive.
How do I request first-time abatement?
Call the IRS at 800-829-1040 and ask. You can also write a letter referencing IRM 20.1.1.3.6.1. The representative can check your compliance history and process the abatement on the spot if you qualify.
Sources
Work With The Reed Corporation
Facing IRS penalties or need help getting back into compliance? Our CPA team handles penalty abatement requests, payment plans, and back-filed returns for clients across NYC, LA, and Miami.