Roughly 14 million individual taxpayers owed the IRS money after filing their 2024 returns, according to agency data. If you are one of them and you have not arranged a payment plan yet, the cost of waiting is growing every single day. The IRS charges a failure-to-pay penalty of 0.5% of your unpaid balance each month, and on top of that, underpayment interest for the second quarter of 2026 sits at 8% annually, as listed on the agency’s quarterly interest rates page. Together, those charges can add hundreds or even thousands of dollars to a tax bill within a year.
But there is one step that immediately reduces the damage: setting up an IRS installment agreement. For taxpayers who filed their returns on time, entering a payment plan cuts the monthly penalty rate in half, from 0.5% to 0.25%. Interest still accrues on the remaining balance, but the penalty reduction alone can save a meaningful amount over a 12- or 24-month repayment window.
How the penalty and interest math actually works
The failure-to-pay penalty is spelled out in 26 U.S. Code Section 6651. The standard rate is 0.5% of unpaid tax per month (or partial month), and it caps at a cumulative 25% of the original balance. On a $10,000 debt, that translates to $50 in penalty charges during the first month, with a ceiling of $2,500 if the bill goes entirely unaddressed for years.
Once a taxpayer who filed on time enters an approved installment agreement, the monthly penalty rate drops to 0.25%, per the IRS’s failure-to-pay penalty page. That lower rate applies for every month the agreement remains active and in good standing.
Interest runs on a separate track. Under 26 U.S. Code Section 6601, interest accrues from the original due date of the return until the balance is paid in full. The IRS recalculates the underpayment rate each quarter, using the federal short-term rate plus 3 percentage points for individual taxpayers. For the quarter that began April 1, 2026, that rate is 8%. Because interest applies to both unpaid tax and accumulated penalties, the compounding effect accelerates the longer a balance remains outstanding.
In practical terms: a taxpayer who owes $10,000 and takes no action will face $50 in penalties the first month at the 0.5% rate, plus roughly $67 in interest at the 8% annual rate. After entering an installment agreement, that same taxpayer’s first-month penalty drops to $25, while the interest charge stays at $67. Over 12 months of steady payments reducing the principal, the penalty savings alone approach $300 on that starting balance.
What an installment agreement actually involves
The IRS offers several types of payment plans, and the differences in cost and eligibility are worth understanding before you apply.
A short-term payment plan gives taxpayers up to 180 days to pay in full. There is no setup fee when arranged through the IRS Online Payment Agreement tool.
A long-term installment agreement, for balances that will take more than 180 days to resolve, requires monthly payments and carries a setup fee. As of the current IRS fee schedule, that fee is $22 if payments are made by direct debit online, or $69 for non-direct-debit plans set up online. Applying by phone, mail, or in person raises the fee to $178. Low-income taxpayers may qualify for reduced or waived fees.
Taxpayers who owe $50,000 or less in combined tax, penalties, and interest can generally set up a long-term plan online without calling the IRS or submitting detailed financial documentation. Those who owe more may need to file Form 9465 and, in some cases, Form 433-F, which requires a full disclosure of income, expenses, and assets.
One detail that trips people up: entering an installment agreement does not freeze interest. The 8% annual rate (or whatever the prevailing quarterly rate happens to be) continues to compound on the unpaid balance for as long as any amount remains. The agreement only reduces the penalty rate. For anyone budgeting their payments, that distinction matters, because interest alone can add several hundred dollars per year on a five-figure balance.
First-time penalty abatement: a relief option most taxpayers never request
Beyond installment agreements, the IRS offers an administrative waiver called first-time penalty abatement that can eliminate the failure-to-pay penalty entirely for qualifying taxpayers. To be eligible, you must meet three conditions: no penalties on your account for the three tax years prior to the year in question, all currently required returns filed (or a valid extension on file), and any tax due either paid or arranged through a payment plan.
This relief covers the failure-to-pay penalty, the failure-to-file penalty, and the failure-to-deposit penalty for businesses. It does not reduce or eliminate interest. Taxpayers can request it by calling the IRS directly or, in some cases, by responding to a penalty notice in writing.
For someone carrying a $10,000 balance over a long repayment period, getting the failure-to-pay penalty waived could save a substantial amount, potentially up to $2,500 if the penalty would otherwise hit its 25% statutory cap. In practice, most taxpayers who set up installment agreements will pay off their balances well before reaching that ceiling, but even partial penalty relief can be worth hundreds of dollars.
The catch: the IRS does not proactively offer this waiver. You have to know it exists and specifically ask for it. Tax professionals say many eligible filers never take advantage of it simply because they are unaware it is available.
Why waiting even a few months makes the problem measurably worse
The compounding structure of IRS debt creates a widening gap between taxpayers who act quickly and those who put it off. Penalties accrue monthly. Interest compounds daily. And because interest applies to accumulated penalties as well as the original tax, every month of inaction increases the base on which future interest is calculated.
Consider two taxpayers who each owe $8,000 after filing their 2024 returns. Taxpayer A sets up an installment agreement in May 2026 and begins making $400 monthly payments right away. Taxpayer B does nothing for six months, then starts making the same $400 payments in November 2026. By the time both have fully paid off their balances, Taxpayer B will have paid meaningfully more in combined penalties and interest. The difference is not because the rates changed. It is because six additional months of full-rate penalties and compounding interest accumulated before any payments began.
The IRS makes this point in its own guidance for filers who have not yet paid, urging taxpayers to pay as much as they can immediately and arrange a plan for the rest. Partial payment now reduces the balance on which future charges are calculated, which is the single most effective way to slow the growth of a tax debt.
What about other options if you cannot afford monthly payments?
Installment agreements assume you can make regular monthly payments. But some taxpayers genuinely cannot. For those situations, the IRS offers two other paths worth knowing about.
An Offer in Compromise allows qualifying taxpayers to settle their tax debt for less than the full amount owed. The IRS evaluates these applications based on income, expenses, asset equity, and ability to pay. Acceptance rates are low (the IRS accepted roughly 30% of offers in recent fiscal years, according to agency reports), and the process can take months. But for taxpayers facing genuine financial hardship, it can result in significant debt reduction.
Separately, taxpayers who cannot pay anything at all may request Currently Not Collectible status, which temporarily halts IRS collection activity. Interest and penalties continue to accrue, but the IRS will not levy wages or bank accounts while the status is active. The agency periodically reviews these cases to determine whether the taxpayer’s financial situation has changed.
Neither option is quick or guaranteed, but both are worth exploring before ignoring a tax bill and letting penalties and interest run unchecked.
Rates could shift again in July 2026
The underpayment interest rate for the quarter beginning July 1, 2026, has not yet been announced as of late May 2026. The IRS typically publishes the new rate in a Revenue Ruling about one month before the quarter starts. Taxpayers carrying balances into the second half of the year should monitor the IRS quarterly interest rates page for updates. Even a one-percentage-point change alters the cost of carrying debt over a 12- or 24-month repayment window.
What is not going to change: the penalty reduction for installment agreements. That 0.25% rate has been part of the tax code for decades, and it remains the fastest, simplest way to cut the cost of an unpaid tax bill. The application takes about 15 minutes online. The penalty savings start the moment the plan is approved. And every month that passes without one in place is a month at the higher rate that you do not get back.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
