When the IRS pauses collection actions for taxpayers facing financial hardship or during a pending Offer in Compromise, the debt does not stand still. Penalties and IRS interest continue to grow daily, adding hundreds or even thousands of dollars to unpaid balances. Federal law requires the IRS to keep charging interest until the full amount of tax debt is paid or legally expires.
Many taxpayers assume that when the IRS stops calling or sending collection notices, their debt is frozen. In reality, interest and penalties continue to accumulate daily. The agency may halt enforcement actions such as wage garnishments or bank levies, but that pause does not suspend the financial clock.
According to IRS.gov, the IRS interest rate is adjusted quarterly and is based on the federal short-term rate plus three percent. As of late 2024, the annual rate is about eight percent, compounded daily. This means interest applies not only to the original amount owed but also to penalties added for late payment or late filing.
The Taxpayer Advocate Service confirms that collection pauses, such as “Currently Not Collectible” status, do not stop the accumulation of interest and penalties. Even during financial hardship, taxpayers remain liable for the growing balance until it is fully paid or resolved through a qualifying agreement.
When taxpayers request relief or a temporary suspension of collection, the IRS carefully reviews their financial information to determine the appropriate course of action. Officials require details about income, expenses, and assets to determine whether the taxpayer qualifies for a payment plan or compromise. While this process may pause enforcement, it does not pause the accrual of interest.
If a taxpayer enters an installment agreement, regular payments reduce the debt; however, interest continues to accrue on the remaining balance. In some cases, the monthly payment barely covers the new charges added each month. A $25,000 liability can grow by more than $2,000 a year if payments are too small to offset interest and penalties.
The IRS office managing these accounts also applies penalties for failure to pay or failure to file. The failure-to-file penalty is five percent per month, while failure-to-pay adds 0.5 percent monthly until the maximum is reached. The combination of penalties and daily compounding interest can significantly increase the total liability over time.
Taxpayers who cannot afford to pay the full amount of their debt may submit an Offer in Compromise, or OIC, to settle for less. This application requires the IRS to evaluate detailed financial statements, verify income and assets, and determine whether accepting a reduced amount is in the government’s best interest.
However, while the offer is under review, the interest meter continues to run. The IRS states on its OIC page that penalties and interest continue to accrue during the review process. If an offer is rejected, the taxpayer is liable for the original amount plus any interest and penalties accrued during that time.
“Submitting an offer gives temporary relief from collection pressure, but it doesn’t stop the growth of debt,” said a tax professional familiar with IRS settlement programs. “It’s important to budget for added costs if the offer takes months to resolve.”
Another option for taxpayers is to establish an installment agreement, which allows for payments to be made over a specified period. Once approved, the IRS generally ceases enforcement actions as long as timely payments are made. Yet the interest and penalties remain active until the balance is paid in full.
IRS guidance explains that even when taxpayers are paying under an agreement, new charges are added daily. Paying more than the minimum each month reduces the total amount owed faster and limits additional interest. The agency also urges taxpayers to continue filing all required tax returns on time to avoid further penalties.
For those unable to pay anything immediately, the IRS may temporarily delay collection under “Currently Not Collectible” status. While this prevents immediate enforcement, the taxpayer’s balance will continue to grow. The Taxpayer Advocate Service notes that many taxpayers misunderstand this process and later discover their liability has increased substantially.
The IRS recommends that all taxpayers continue filing annual tax returns, even if they are unable to pay the amount due. Filing prevents the higher failure-to-file penalty and helps maintain eligibility for payment agreements or settlement programs. Secure online portals identified by the locked padlock icon allow taxpayers to upload forms and financial data safely.
Taxpayers with open bankruptcy proceedings should also contact their IRS office to discuss how ongoing interest applies. Some liabilities may be suspended during bankruptcy, but most interest on nondischargeable taxes continues to accrue. Understanding these distinctions early can help prevent further issues when the case closes.
Regular communication with the IRS can make a significant difference. Taxpayers are encouraged to discuss any changes in income, living expenses, or financial circumstances that may require adjustments to their agreements. Updating financial information helps the IRS apply payments correctly and keep the case in good standing.
Taxpayers who are unable to resolve their debt on their own should seek assistance through official or nonprofit programs. The Taxpayer Advocate Service assists those facing financial hardship or unresolved disputes. Low-Income Taxpayer Clinics provide free or low-cost legal assistance to eligible individuals.
The IRS also offers resources for setting up payment plans, submitting Offer in Compromise applications, and verifying account balances online. Each IRS page lists when it was last reviewed or updated, ensuring the information reflects current law and interest rates. Taxpayers can use these pages to confirm current rates, access application forms, or email questions about their accounts.
“Understanding that interest and penalties continue during paused collections helps taxpayers make informed choices,” said an IRS spokesperson. “The best way to prevent added charges is to pay as much as possible, file on time, and stay in contact with the agency.”
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