The IRS charges interest on unpaid taxes, whether you set up a payment plan or not
The interest itself is not a separate charge for having a payment plan. Instead, the IRS charges interest on the tax debt itself from the date the tax was due until you pay it in full. The rate is set by law and changes quarterly. As of early 2024, the rate is 8 percent per year, compounded daily. That rate applies to all unpaid federal taxes, regardless of whether you pay in a lump sum or over time.
What changes with a payment plan is that you also owe a setup fee — a one-time charge to establish the plan itself. That fee ranges from $31 to $225 depending on how you set up the plan and your income level. The setup fee is separate from interest and is added to your total debt.
On top of the interest and setup fee, the IRS also charges a failure-to-pay penalty of 0.5 percent per month on the unpaid balance, as long as the balance remains unpaid. This penalty accrues whether you have a payment plan or not, but a payment plan does not stop it from running.
Key Takeaways
- The IRS interest rate is set by law and changes every quarter; it is currently 8 percent per year, compounded daily, and applies to all unpaid taxes regardless of payment method.
- A payment plan itself costs a setup fee of $31 to $225 depending on your income and how you set it up, and this fee is added to your debt.
- The failure-to-pay penalty of 0.5 percent per month continues to accrue on your unpaid balance even while you are making payments on a plan.
- Interest and penalties compound, meaning the longer you take to pay, the more you owe in total, even if your monthly payment stays the same.
How the IRS interest rate is set and when it changes
The IRS interest rate is tied to the federal short-term rate plus 3 percentage points. Congress sets this formula in the tax code, and the IRS publishes a new rate every three months. The rate changes on January 1, April 1, July 1, and October 1 each year.
If you are already on a payment plan when the rate changes, your new interest accrual will use the new rate going forward. Your existing balance does not retroactively recalculate. The IRS publishes the current rate on its website and notifies taxpayers by mail when a change takes effect.
The interest rate applies the same way to all payment plans — installment agreements, short-term extensions, and long-term plans all use the same quarterly rate. The rate does not vary based on your income, credit score, or the size of your debt.
Setup fees for different types of payment plans
The setup fee depends on which payment plan you choose and how you set it up. If you set up a plan online through IRS.gov or by phone with an IRS representative, the fee is $31 for a short-term extension (120 days or less) or $225 for a long-term installment agreement. If you set up a plan by mail or in person, the fee is $225 for any plan.
Low-income taxpayers may pay a reduced fee of $31 for a long-term installment agreement if their income is at or below 250 percent of the federal poverty line. The IRS determines this based on your most recent tax return and current household size. You do not need to request the reduction — the IRS applies it automatically if you meet the threshold.
The setup fee is added to your total tax debt and begins accruing interest when ready. If you set up a plan for $10,000 in back taxes and pay a $225 setup fee, you now owe $10,225, and interest accrues on that full amount.
How interest and penalties compound on a payment plan
Interest compounds daily, which means each day's interest is calculated on the previous day's balance plus all accrued interest. If you owe $5,000 at 8 percent annual interest, the daily rate is roughly 0.022 percent. On day one, you owe about $1.10 in interest. On day two, you owe interest on $5,001.10, and so on.
The failure-to-pay penalty of 0.5 percent per month also compounds. If you owe $5,000 and miss a payment, the penalty accrues on the full $5,000 plus any interest already added. The next month, the penalty accrues on the new, higher balance. Over time, this means your balance grows even if you make no additional payments.
A payment plan does not stop either interest or penalties from accruing. Each month, your payment covers part of the principal, but interest and penalties continue to add to the balance. If your monthly payment is less than the monthly interest and penalty combined, your balance will actually grow despite making payments.
What happens if you miss a payment on your plan
If you miss a payment, the IRS may terminate your plan and demand full payment of the remaining balance. However, the IRS typically sends a notice before terminating, giving you a chance to catch up. If you make the missed payment within a set period (usually 30 days from the notice), your plan remains active.
While your plan is in jeopardy, interest and penalties continue to accrue at the same rate. The failure-to-pay penalty does not increase if you miss a payment — it remains 0.5 percent per month — but it keeps running. If your plan is terminated, you lose the benefit of the structured payment schedule and may face collection action.
If you know you cannot make a payment, contact the IRS before the due date. The IRS can temporarily pause your plan or adjust your payment amount if your financial situation has changed. This is better than missing a payment and risking termination.
How to estimate your total cost over the life of a payment plan
To estimate what you will owe by the end of your plan, you need three numbers: your starting balance, the current interest rate, and your monthly payment amount. The IRS provides a payment plan calculator on its website that shows estimated interest and penalties based on these inputs.
As a rough example: if you owe $10,000 in taxes, set up a plan with a $225 fee (total debt $10,225), and pay $200 per month at 8 percent annual interest, you will pay roughly $12,500 to $13,000 total by the time the debt is paid off — meaning interest and penalties add $2,275 to $3,775 to your original debt. The exact amount depends on the interest rate at the time you set up the plan and whether the rate changes during your payment period.
The longer your plan runs, the more interest you pay. A 60-month plan costs significantly more in interest than a 36-month plan on the same debt. If you can afford a higher monthly payment, you reduce the total interest owed.
Frequently Asked Questions
Can I negotiate the interest rate the IRS charges?
No. The interest rate is set by federal law and applies to all taxpayers equally. The IRS does not negotiate rates based on income, circumstances, or creditworthiness. The only way to reduce the total interest you pay is to pay off the debt faster.
Does the interest rate change if I switch payment plans?
No. The interest rate remains the same regardless of which payment plan you choose. Switching from one plan to another does not change the rate, though you may owe a new setup fee if you establish a different plan. The rate only changes on the quarterly dates set by the IRS.
What if I pay off my plan early — do I owe less interest?
Yes. Interest accrues daily, so paying off early stops the clock on future interest. If you pay off your balance three months before your plan was scheduled to end, you avoid three months of interest charges. There is no penalty for early payment.
Is the failure-to-pay penalty the same as the interest rate?
No. Interest is 8 percent per year (as of early 2024), compounded daily. The failure-to-pay penalty is 0.5 percent per month, which equals 6 percent per year. Both accrue on your unpaid balance, so together they add roughly 14 percent per year to what you owe.
What if the IRS interest rate goes up while I am on a payment plan?
Your monthly payment amount does not change, but the interest accruing on your remaining balance will increase. If the rate rises from 8 percent to 9 percent, your next month's interest will be calculated at the higher rate. This means more of your payment goes toward interest and less toward principal.