The IRS charges interest on what you owe, whether you're on a payment plan or not

The interest rate on an IRS payment plan is the same as the interest rate on any unpaid tax debt: the federal short-term rate plus 3 percent. The IRS sets this rate quarterly. As of early 2024, the rate is 8 percent per year, but this changes every three months based on Treasury rates. The IRS publishes the current rate on its website.

Interest accrues daily on your unpaid balance. If you owe $5,000 and the rate is 8 percent, you're paying roughly $1.10 per day in interest alone. That interest compounds — it gets added to your balance, and then you pay interest on the interest. A payment plan does not stop interest from running. It only lets you pay the original debt plus interest and penalties over time instead of in one lump sum.

The IRS also charges a failure-to-pay penalty on top of interest. This penalty is 0.5 percent of your unpaid tax per month (or part of a month), up to 25 percent total. Like interest, it accrues daily and compounds. On a payment plan, this penalty usually stops growing once you're current with your payments, but it does not disappear — you pay it as part of your plan.

Key Takeaways

  • Interest on an IRS payment plan is the federal short-term rate plus 3 percent, set quarterly and currently around 8 percent per year.
  • Interest accrues daily on your unpaid balance and compounds, meaning you pay interest on the interest.
  • The IRS also charges a failure-to-pay penalty of 0.5 percent per month, separate from interest, up to a maximum of 25 percent.
  • Both interest and penalties continue to grow until your tax debt is fully paid, even while you're on a payment plan.
  • Paying off your debt faster reduces the total interest and penalties you'll owe over the life of the plan.

How the interest rate is calculated and when it changes

The IRS interest rate is tied to the federal short-term rate, which the Treasury Department sets based on market conditions. The IRS adds 3 percentage points to that rate. The combined rate is announced at the start of each calendar quarter — January, April, July, and October — and applies to all unpaid tax debt for that three-month period.

This means your interest rate can change while you're on a payment plan. If you start a plan in January when the rate is 8 percent, and the rate rises to 9 percent in April, the higher rate applies to your remaining balance going forward. The IRS does not retroactively adjust what you've already paid, but your monthly payment does not change unless you renegotiate the plan.

You can find the current interest rate on the IRS website under "Interest Rates" or ask the IRS representative handling your plan. The rate applies to all unpaid federal income tax, self-employment tax, and other federal taxes.

The failure-to-pay penalty and how it stacks with interest

The failure-to-pay penalty is separate from interest and is calculated as 0.5 percent of your unpaid tax for each month or part of a month that the tax remains unpaid. This penalty accrues on top of your original tax debt and the interest already owed. The maximum penalty is 25 percent of your original tax liability.

On a payment plan, this penalty stops growing once you make your first payment and stay current. However, the penalty you've already accumulated remains part of your total debt. If you owe $10,000 in tax and have accumulated a $500 penalty before entering a plan, you're paying off $10,500 plus interest on both amounts.

There is also a failure-to-file penalty if you did not file a return on time. This is 5 percent per month, up to 25 percent. If both penalties explore, the IRS subtracts the failure-to-pay penalty from the failure-to-file penalty to avoid double-counting, but you still owe the combined amount.

What happens to interest and penalties if you miss a payment

If you miss a payment on your plan, the failure-to-pay penalty resumes growing at 0.5 percent per month. Interest continues to accrue regardless. Missing a payment does not when ready cancel your plan, but the IRS will contact you. If you miss payments for several months, the IRS may terminate the plan and demand full payment of the remaining balance.

If your plan is terminated, you're back to owing the full amount when ready, plus all accrued interest and penalties. The IRS can then pursue collection actions like wage garnishment or bank levy. Staying current on your plan payments, even if they're small, prevents this escalation.

How to reduce the total interest you'll pay

The longer your payment plan runs, the more interest and penalties you'll owe in total. A 60-month plan will cost significantly more in interest than a 24-month plan on the same debt, because interest accrues for longer.

If you can afford larger monthly payments, shortening the plan term reduces your total interest cost. For example, paying $250 per month instead of $150 per month cuts the plan from 40 months to 24 months, saving you months of interest accrual. You can request a shorter plan term when you set up the plan, or ask the IRS to modify your plan later if your financial situation improves.

You can also make lump-sum payments toward your balance at any time without penalty. If you receive a tax refund, bonus, or inheritance, explore it to your IRS debt when ready stops interest from accruing on that amount.

Interest on different types of IRS payment plans

The interest rate is the same across all IRS payment plan types — short-term plans, long-term installment agreements, and streamlined installment agreements. What differs is how long you have to pay and what fees you pay upfront.

A short-term payment plan (120 days or less) has no setup fee. A long-term installment agreement typically has a setup fee of $31 to $225 depending on how you enter the plan. A streamlined installment agreement (for debts under $50,000) has a lower setup fee of $31 to $50. These fees are separate from interest and penalties — they're charged once, upfront.

Regardless of plan type, interest accrues daily on your unpaid balance at the same rate. The plan type only affects how much you pay per month and how long you have to pay.

How interest compounds on a payment plan

Interest compounds daily, meaning the IRS calculates interest on your remaining balance each day, and that interest gets added to your balance. The next day's interest is calculated on the new, higher balance. Over months and years, this compounding effect significantly increases what you owe.

Here's a concrete example: if you owe $5,000 at 8 percent annual interest and make no payments, after one year you'll owe roughly $5,400 (the original $5,000 plus $400 in interest). If you're on a payment plan paying $100 per month, your balance drops by $100 each month, but interest accrues on the remaining balance. Your first payment covers roughly $33 in interest and $67 in principal. By your final payment, nearly all of it goes to principal because the balance is smaller. The total interest you pay depends on how many months the plan runs.

Frequently Asked Questions

Can I get the IRS to lower my interest rate?

No. The interest rate is set by law and applies to all taxpayers. The IRS cannot reduce or waive it. However, you can reduce the total interest you owe by paying off your debt faster or making extra payments toward your balance.

Does the interest rate change if I switch payment plan types?

No. The interest rate stays the same regardless of which plan you choose. What changes is your monthly payment amount and the total length of the plan. Switching plans does not affect the interest rate applied to your remaining balance.

What if I pay off my plan early?

You can pay off your plan at any time without penalty. Interest stops accruing once your balance reaches zero. Paying early saves you the interest that would have accrued over the remaining months of the plan.

Is the interest on an IRS payment plan tax deductible?

Interest on federal income tax debt is generally not deductible. However, if you're self-employed and the debt relates to business income, some interest may be deductible as a business expense. Consult a tax professional about your specific situation.

How often does the IRS interest rate change?

The IRS interest rate changes quarterly — on January 1, April 1, July 1, and October 1 each year. The new rate applies to all unpaid tax debt for that quarter. The IRS publishes the rate in advance on its website.