What interest rate you pay on an IRS payment plan

The IRS charges interest on any tax you owe, whether you pay in full immediately or set up a payment plan. The interest rate itself does not change based on the plan — it is the same rate for everyone. As of 2024, the interest rate is 8 percent per year, but this rate changes quarterly based on federal short-term interest rates. The IRS announces the new rate in early January, April, July, and October each year.

Interest accrues daily on your unpaid balance. If you owe $5,000 and the interest rate is 8 percent annually, you accumulate roughly $1.10 per day in interest charges. The longer your payment plan runs, the more total interest you pay — even though the monthly payment itself stays the same.

On top of interest, the IRS also charges a failure-to-pay penalty of 0.5 percent per month on any unpaid tax, unless you have a valid reason for the delay. This penalty is separate from interest and also accrues daily. Together, interest and penalties can add 10 to 15 percent to your original tax bill over the course of a multi-year payment plan.

Key Takeaways

  • The IRS interest rate is set quarterly and applies to all payment plans; as of 2024 it is 8 percent per year, but you should confirm the current rate when you set up your plan.
  • Interest accrues daily on your unpaid balance, so a longer payment plan means you pay more total interest even if your monthly payment stays the same.
  • The failure-to-pay penalty of 0.5 percent per month is charged in addition to interest and also accrues daily on any unpaid tax.
  • You can reduce total interest by paying off your plan early; the IRS does not charge a prepayment penalty.
  • Short-term payment plans (120 days or less) may have lower or no setup fees, while long-term installment agreements typically charge a $31 to $225 setup fee depending on how you set up the plan.

How the interest rate changes throughout the year

The IRS calculates its interest rate by taking the federal short-term rate and adding 3 percentage points. The federal rate changes based on Treasury bond yields, which fluctuate with the broader economy. When the Federal Reserve raises interest rates, the IRS rate rises with it. When the Fed cuts rates, the IRS rate falls.

The IRS publishes the new rate on its website in early January, April, July, and October. The rate becomes effective on the first day of the following month — so a rate announced in early January takes effect February 1. If you are on a payment plan when the rate changes, your interest rate updates automatically; you do not have to do anything. Your monthly payment amount does not change, but the portion of each payment that goes toward interest versus principal shifts.

You can find the current and historical IRS interest rates on the IRS.gov website under "Interest Rates." Knowing the current rate helps you estimate how much total interest you will pay over the life of your plan.

Setup fees for different types of payment plans

The IRS charges a setup fee when you establish a payment plan, and the amount depends on which type of plan you choose and how you set it up. A short-term payment plan (you pay off the debt within 120 days) has no setup fee. A long-term installment agreement (payments over more than 120 days) costs between $31 and $225 to set up.

The fee varies based on how you set up the plan. If you set up an installment agreement online through IRS.gov or by phone with an automated system, the fee is $31. If you work with an IRS representative by phone or in person, the fee is $225. If you set up the plan through a tax professional or payment processor, fees may be higher. Some low-income taxpayers may be able to reduce or waive the setup fee; you can ask about this when you contact the IRS.

The setup fee is added to your total debt and accrues interest just like the rest of your balance. So if you owe $3,000 and set up a long-term plan online, your balance becomes $3,031, and interest accrues on that $3,031.

How much total interest you will pay on a payment plan

The total interest depends on three things: how much you owe, how long your plan runs, and what the interest rate is during that time. A rough estimate: if you owe $5,000 and set up a 36-month plan at 8 percent interest, you will pay roughly $600 to $700 in interest over those three years. If the same debt is spread over 60 months, you will pay roughly $1,000 to $1,200 in interest.

You can use the IRS payment plan calculator on IRS.gov to estimate your monthly payment and total interest for a specific debt amount and plan length. The calculator shows you the breakdown so you can compare different plan lengths before you commit. Keep in mind the calculator uses the current interest rate; if rates change during your plan, your total interest may be different.

The failure-to-pay penalty also adds to your total cost. If you do not pay on time, the penalty increases from 0.5 percent per month to 1 percent per month. Staying current on your monthly payments keeps the lower penalty rate in place.

Paying off your plan early and reducing interest

You can pay off your IRS payment plan at any time without penalty. The IRS does not charge a prepayment fee or early-payoff fee. If you receive a tax refund, inheritance, or bonus during your plan, you can put that money toward your balance and reduce the amount of interest you owe going forward.

Paying even a small amount extra each month can save significant interest over time. If your plan is set for 60 months but you can pay it off in 48 months, you avoid 12 months of interest accrual. The IRS will recalculate your remaining balance and interest when you make extra payments, so you see the benefit immediately.

To make an extra payment, contact the IRS or log into your account on IRS.gov. You can specify that the extra payment should go toward principal rather than being held as a credit. Always confirm with the IRS that your extra payment was applied correctly.

Interest rates on different types of IRS debt

The 8 percent rate (as of 2024) applies to income tax, self-employment tax, and most other tax debts. The rate is the same whether you owe federal income tax, back payroll taxes, or excise taxes. However, the failure-to-pay penalty may be different depending on the type of tax and your circumstances.

If the IRS assesses a fraud penalty (75 percent of the unpaid tax), interest accrues on the penalty amount as well as the original tax. This is rare and only applies if the IRS determines you intentionally underpaid. Most payment plans involve only the standard interest rate and the failure-to-pay penalty.

If you have multiple types of tax debt — for example, both income tax and self-employment tax — the IRS typically combines them into a single payment plan with a single interest rate. The plan covers all your federal tax debts at once.

What happens if you miss a payment on your plan

If you miss a payment, the failure-to-pay penalty increases from 0.5 percent per month to 1 percent per month. This higher rate applies to any unpaid balance, not just the missed payment. Interest continues to accrue at the standard rate on top of the higher penalty.

If you miss a payment by more than a few days, the IRS may send you a notice. If you miss payments for several months, the IRS can terminate your payment plan and demand full payment of the remaining balance immediately. Once the plan is terminated, collection actions like wage garnishment or bank levy may begin.

If you know you cannot make a payment, contact the IRS before the due date. You may be able to request a temporary pause, adjust your monthly payment amount, or modify your plan. Acting early is much better than missing payments and facing penalties and plan termination.

Frequently Asked Questions

Does the IRS interest rate change if I am on a payment plan?

Yes. The IRS interest rate changes quarterly, and the new rate applies to your payment plan automatically. Your monthly payment amount does not change, but the portion going toward interest versus principal shifts. You do not need to do anything when the rate changes.

Can I deduct IRS interest and penalties on my taxes?

Interest on tax debt is not deductible. Penalties are also not deductible in most cases. However, if the IRS made an error in calculating your interest or penalties, you can request an abatement (removal) of the erroneous portion. You must request this in writing with documentation of the error.

What if I cannot afford my monthly payment?

Contact the IRS and ask about modifying your plan. You can request a longer payment period to lower your monthly payment, or you may be able to pause payments temporarily if you are facing hardship. The IRS has procedures for taxpayers who cannot pay, and working with them is better than defaulting on your plan.

Is the interest rate the same for everyone?

Yes. The IRS interest rate is the same for all taxpayers and all types of federal tax debt. The rate does not depend on your income, credit score, or payment history. It is set quarterly based on federal short-term interest rates.

Can I pay my IRS payment plan with a credit card?

Yes, but credit card companies charge a processing fee (usually 1.87 to 2.35 percent of the payment). This fee is in addition to the IRS interest rate. For large payments, the credit card fee can be substantial, so compare the cost before you decide to use a credit card.