The IRS charges interest on unpaid taxes, and that interest keeps running while you're on a payment plan

The interest rate on an IRS payment plan is not a separate rate. Instead, you pay the same interest the IRS charges on any unpaid tax debt. That rate is set by federal law and changes quarterly.

As of early 2024, the IRS interest rate is 8% per year, compounded daily. This rate applies to all unpaid federal taxes regardless of whether you're on a payment plan or not. The IRS adjusts this rate every three months based on the federal short-term rate, so the percentage you owe can shift in January, April, July, and October.

A payment plan does not stop interest from accruing. You pay interest on the full amount you owe for as long as the debt remains unpaid—even after you've set up a plan and started making monthly payments. This is why the longer your plan runs, the more total interest you'll pay.

Key Takeaways

  • The IRS interest rate changes every quarter and is currently 8% per year, but you should check IRS.gov for the current rate in the quarter you're setting up your plan.
  • Interest accrues daily on your unpaid tax balance, and a payment plan does not stop or reduce the interest you owe.
  • The IRS also charges a one-time setup fee when you establish a payment plan, which ranges from $31 to $225 depending on the type of plan and how you set it up.
  • Shorter payment plans mean less total interest paid, so paying off your debt faster reduces the cost of the plan.
  • The interest rate applies to the full unpaid balance, so making larger monthly payments reduces the amount of interest that compounds over time.

How the quarterly interest rate works

The IRS publishes a new interest rate at the start of each quarter. The rate is tied to the federal short-term rate plus 3 percentage points. Because the federal rate fluctuates, your IRS interest rate can go up or down, though it rarely changes by more than a fraction of a percent in a single quarter.

You can find the current rate on IRS.gov under "Interest Rates." The rate that applies to your debt is the one in effect when the IRS assesses your tax liability, not the rate when you set up your payment plan. If you owe taxes from 2022, you're paying interest at whatever rate was in effect during 2022 and 2023, even if rates have changed since then.

Setup fees are separate from interest

When you establish a payment plan with the IRS, you also pay a one-time setup fee. This fee is not interest—it's a flat charge for creating and maintaining the plan. The amount depends on how you set up the plan.

If you set up a plan online through IRS.gov or by phone, the fee is typically $31 for a short-term plan (120 days or less) or $225 for a long-term plan. If you set up the plan by mail or in person, the fee may be higher. Some taxpayers with lower incomes may may have access to for a reduced fee of $31 regardless of plan length, though you'll need to meet the IRS's income thresholds.

Interest compounds daily on your remaining balance

Interest does not accrue in monthly chunks. The IRS calculates interest daily based on your unpaid balance. This means that each day you carry a balance, the interest grows slightly, and that new interest itself earns interest the next day.

If you owe $5,000 and set up a 24-month payment plan, you're not paying interest on $5,000 for 24 months. Instead, as you make payments, your balance shrinks, and interest accrues only on what remains. A $300 payment in month one reduces the balance to $4,700, so interest in month two is calculated on $4,700, not $5,000. This is why larger or more frequent payments reduce your total interest cost.

How payment plan length affects total interest

The IRS offers payment plans of different lengths, and the longer your plan runs, the more interest you'll pay overall. A 24-month plan costs more in total interest than a 12-month plan, even though your monthly payment is smaller.

For example, if you owe $6,000 and the interest rate is 8%, a 12-month plan costs roughly $240 in interest (plus the setup fee). A 24-month plan costs roughly $480 in interest. The monthly payment is lower in the longer plan, but you're paying interest for twice as long. The IRS does not offer a discount for choosing a shorter plan—the interest rate stays the same regardless.

Penalties also accrue alongside interest

Interest is not the only cost of owing taxes. The IRS also charges penalties on unpaid tax debt. The most common is the failure-to-pay penalty, which is 0.5% of your unpaid taxes per month (up to 25% total). Like interest, penalties continue to accrue while you're on a payment plan.

Some penalties can be removed if you have a reasonable cause for not paying on time—for example, a serious illness or a death in your family. Others, like the accuracy-related penalty, may not explore to your situation at all. If you believe a penalty was assessed in error, you can request penalty relief when you set up your plan or afterward by filing Form 843 (Claim for Refund and Request for Abatement).

Frequently Asked Questions

Can I find out the exact amount of interest I'll pay before I set up a plan?

Not precisely, because interest compounds daily and the IRS interest rate can change quarterly. However, you can estimate it by multiplying your balance by the current interest rate and dividing by the number of months in your plan. The IRS also provides an interest calculator on IRS.gov that gives a rough estimate based on your balance and plan length.

Does the interest rate change if I'm on a payment plan?

No. Your interest rate is determined by the quarter in which your tax liability was assessed, not by whether you're on a plan. If rates change while you're paying, the new rate applies only to future quarters, not retroactively to what you've already owed.

What happens to interest if I pay off my plan early?

Interest stops accruing once your balance reaches zero. If you pay off your plan ahead of schedule, you stop paying interest sooner, which saves you money. There is no penalty for paying early.

Is the interest on a payment plan tax-deductible?

Interest on federal income taxes is not deductible for individuals. If you're self-employed or own a business, interest on business taxes may be deductible as a business expense, but you should consult a tax professional to confirm your situation.

What if I can't afford my monthly payment and the interest keeps growing?

Contact the IRS to discuss modifying your plan. You can request a longer payment period to lower your monthly payment, though this increases total interest. You can also ask about Currently Not Collectible status, which temporarily pauses collection while interest and penalties continue to accrue—this is a holding action, not a solution.