IRS Interest and Penalties for 2025 Tax Returns Continue
The Internal Revenue Service is continuing to apply interest charges and penalty rules to 2025 tax returns, with those costs extending into early 2026. Taxpayers who file late, pay late, or carry unpaid balances may face rising amounts as interest compounds daily, and penalties accrue monthly.
For all quarters of 2025 and the first quarter of 2026, the IRS has maintained an interest rate of 7 percent per year on unpaid federal tax balances. The rate applies to both underpayments and overpayments and is compounded daily, which can significantly increase the amount owed over time.
Interest begins accruing on any unpaid balance from the original due date of the return, typically April 15 for individual filers. Filing an extension does not delay the start of interest charges, because extensions apply only to filing deadlines, not payment deadlines.
IRS interest rates are set quarterly and are based on the federal short-term rate plus three percentage points. Most individual and corporate underpayments are charged the same rate, while large corporate underpayments exceeding $100,000 are subject to a higher rate. IRS guidance states that interest generally cannot be removed unless the agency itself caused the delay.
Taxpayers who do not file a required return by the deadline are subject to a failure-to-file penalty of 5 percent of the unpaid tax for each month the return is late. The penalty is capped at 25 percent of the unpaid balance and is calculated after credits and withholding are applied.
Returns filed more than 60 days after the due date are subject to a minimum penalty. For 2025 tax returns filed in 2026, the minimum penalty is $525 or 100 percent of the unpaid tax, whichever is less. The IRS adjusts this amount periodically for inflation.
Partnerships and S corporations are subject to separate late-filing penalties that are assessed per partner or shareholder. For returns due after December 31, 2025, the base penalty is $255 per owner per month, which can result in substantial penalties for entities with multiple stakeholders.
Taxpayers who file their returns on time but do not pay the full amount owed are subject to a failure-to-pay penalty. This particular penalty accrues at a rate of 0.5% for each month on the unpaid balance, with a maximum penalty of 25%.
If the IRS issues a notice of intent to levy and the balance remains unpaid for 10 days, the monthly penalty rate can increase to 1 percent. Taxpayers who enter into an approved installment agreement may qualify for a reduced failure-to-pay penalty rate of 0.25 percent per month.
When both failure-to-file and failure-to-pay penalties apply during the same month, the IRS reduces the amount of the failure-to-file penalty by the amount of the failure-to-pay penalty. This coordination limits overlap but does not prevent balances from growing.
The IRS allows penalty relief in certain circumstances. Taxpayers may qualify for penalty abatement if they are able to demonstrate reasonable cause, such as serious illness or a natural disaster, or if they meet the requirements for first-time penalty abatement based on prior compliance history.
Interest charges, however, typically remain even if penalties are reduced or removed. IRS guidance explains that federal law mandates interest charges, which the IRS generally removes only when it eliminates the underlying penalty.
Taxpayers facing IRS interest and penalties for 2025 tax returns may reduce costs by filing returns on time, even if they cannot pay in full. Filing promptly helps avoid the higher failure-to-file penalty, while installment agreements can lower monthly failure-to-pay penalties.
Monitoring IRS notices and understanding available payment options can help taxpayers manage balances before penalties and interest escalate further.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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