How the IRS Calculates Penalties and Interest

IRS Penalties and Interest

Failure-to-File Penalty

• 5% of unpaid taxes per month (or part of a month)
• Maximum: 25% of unpaid taxes
• If you file more than 60 days late, minimum penalty is the lesser of:
  • $485 (2025), or
  • 100% of the tax owed

Failure-to-Pay Penalty

• 0.5% of unpaid taxes per month
• Maximum: 25% of unpaid taxes
• Reduced to 0.25% if you're on an installment agreement

Combined Effect

If both penalties apply, failure-to-pay reduces failure-to-file to 4.5%/month, with a combined maximum of 47.5% of unpaid taxes.

Interest

• Charged on unpaid tax, penalties, and interest
• Federal short-term interest rate + 3%
• Currently approximately 7-8% per year
• Compounded daily

Estimated Tax Underpayment Penalty

• Charged if you underpaid during the year
• Calculated quarterly on the underpayment amount
• Avoid by meeting a safe harbor: paying 100% of prior year's tax

Accuracy-Related Penalty

• 20% of the underpayment due to negligence or substantial understatement
• 40% for gross valuation misstatements

Penalty Relief

• First-time abatement: One-time removal of penalties if you have a clean compliance history
• Reasonable cause: Circumstance-based penalty relief

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Have penalties? We can request abatement and potentially eliminate them.