Tax Talk Thursday: A Beginner’s Guide to IRS Penalties and Interest

For many taxpayers, the idea of owing the IRS can feel intimidating — and the thought of extra penalties and interest makes it worse. But the truth is, IRS penalties and interest are surprisingly straightforward once you understand how they work. If you know what triggers them and how they’re calculated, you can avoid unnecessary charges and keep your tax situation under control.

What Triggers IRS Penalties?

The IRS uses penalties to encourage taxpayers to file and pay on time. Here are the most common reasons you might face a penalty:

1. Failure to File - If you don’t file your tax return by the deadline (usually April 15), the IRS may charge a failure-to-file penalty. This penalty is typically 5% of the unpaid tax per month, up to a maximum of 25%.

2. Failure to Pay - If you file your return but don’t pay the tax you owe by the due date, the IRS charges a failure-to-pay penalty. This is usually 0.5% of the unpaid tax per month, up to 25%.

3. Underpayment Penalty - If you don’t pay enough tax throughout the year — either through withholding or estimated payments — you might owe an underpayment penalty. This often applies to self-employed taxpayers or anyone with income not subject to regular withholding.

4. Accuracy-Related Penalty - If the IRS finds that you significantly understated your tax or made errors due to negligence, you could face a penalty equal to 20% of the underpaid amount.

How IRS Interest Works

On top of penalties, the IRS charges interest on any unpaid balance. This interest starts accruing the day after your tax is due and compounds daily until you pay in full. The rate changes quarterly and is based on the federal short-term rate plus 3%.

Unlike penalties, interest can’t be waived just because you acted in good faith — so paying your balance sooner rather than later can save you real money.

Can You Reduce or Remove IRS Penalties?

Yes — in some situations, you can ask the IRS to remove penalties:

First-Time Penalty Abatement — If you have a good history of filing and paying on time, the IRS may grant you a one-time waiver of certain penalties.

Reasonable Cause Relief — If you have a valid reason, like a serious illness, natural disaster, or another circumstance beyond your control, you may qualify for penalty relief.

Interest, however, almost always sticks — it only goes away if your underlying penalty or tax is removed.

Tips to Avoid IRS Penalties and Interest

• File on time, even if you can’t pay in full. Filing avoids the bigger failure-to-file penalty.

• Pay as much as you can, and set up a payment plan for the rest.

• Adjust your withholding if you routinely owe at tax time.

• Make estimated payments if you’re self-employed or have other untaxed income.

IRS penalties and interest can add up quickly, but they’re also preventable. Staying organized, filing on time, and paying what you owe (or as much as possible) are your best tools to keep these extra charges off your tax bill. If you ever get a notice, don’t ignore it — respond promptly and talk to a tax professional if you’re unsure what to do next. Have questions? Email us anytime at info@mkhstaxgroup.com. We’re here to help you navigate your tax situation with confidence.