When a tax debt goes unpaid, the IRS imposes more than just penalties—interest begins to accrue immediately and compounds daily. This interest is not discretionary; it is mandated by law and continues until the full balance is satisfied. For individuals and businesses alike, what begins as a manageable tax liability can quickly escalate into a significant financial exposure if left unresolved. Understanding when interest begins, how it interacts with penalties, and what recourse exists is critical to protecting your financial position.
In addition to unpaid taxes due, penalties can add to your tax liability. There several ways to incur penalties from the Internal Revenue Service (IRS), like failure to file penalties, filing an inaccurate return or filing late. You can accrue a penalty for incorrectly paying payroll taxes or for filing for a large refund for which you are not eligible.
If you are assessed a penalty, you will receive a letter explaining the penalty. Do not toss the letter. Review it carefully to determine if there is a mistake, or whether you wish to challenge the penalty. If you ignore the notice, difficulties and interest will arise. If possible, pay any unpaid tax or penalty by the date due to avoid interest. If your tax debt or the penalty is significant, for example, an assessment for a Report of Foreign Bank and Financial Accounts (FBAR) infraction, confer with your tax attorney.
When do you pay interest?
Basically, the IRS begins to charge interest on the due date of the tax or tax and penalty that you owe. Keep in mind that when you request an extension to file your taxes, interest on unpaid amounts begins to accrue when the tax was originally due to be paid. This is regardless of the extension to file the paperwork. In addition, penalties that relate to a tax return are due on the date the original tax return was filed.
When you are assessed a penalty and related interest, there are two ways you might be able to reduce the amount you owe. You can file an amended return to correct errors, or possibly qualify for relief from the penalty.
Interest rates
While you may take the threat of interest lightly, it is good to keep in mind that the current quarterly interest rate charged by the IRS is seven percent for individual or corporate tax underpayment, compounded daily. You accrue interest on your tax liability until it is paid off.
If you or your company has long-term, significant tax debt, ignoring the matter is not a good option. The IRS may commence collection against you, your assets, or company.
Guidance on compliance and collection issues with the IRS
If involved in a tax controversy or dealing with tax debt, our legal team offers strategic guidance for recognizing and resolving challenges with the IRS. Contact us at 440-250-9709. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.
For additional support, we invite you to explore our comprehensive guide, Since You Asked: 15 Common and Concerning Tax Law Questions & Answers.
