Understanding IRS Penalties and Interest: A 2025 Guide

If you earn income, you’ll owe taxes to the U.S. government and possibly your state and local governments. If you don’t pay enough tax, you may be charged with an underpayment penalty, also referred to as an estimated tax penalty. Knowing your deadlines and responsibilities when paying and filing taxes IS CRITICAL to SAVING taxes. Penalties and interest can add up quickly.

What Are IRS Penalties and Interest?

The IRS can bring penalties and interest against you if you fail to file your returns correctly, fail to file returns on time, or fail to pay taxes. Sometimes penalties and interest totals are higher than the dollar amount of the back taxes that are owed.

Most Common Penalties

Late Payment Penalties

This penalty kicks in if you don’t pay any remaining taxes you owe for the prior year by April 15th or by the tax filing deadline. The penalty is generally 0.5% of your unpaid taxes per month, up to 25% of your unpaid taxes.

Failure To File Penalties

This onerous penalty applies if a taxpayer fails to file an Extension and misses the April 15th deadline, OR misses the October 15th deadline with an Extension. The penalty is 5% of your unpaid taxes per month, up to 25%. If both the Failure to File and Failure to Pay penalties apply in the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty.

Underpayment of Estimated Tax Penalties

This penalty applies if taxpayers didn’t deposit during the prior year at least:

• 90% of their current year tax bill, OR
• 100% of what they owed the year before (110% if they made over $150K).

The IRS doesn’t want to wait until April 15 for you to pay your taxes; they want you to make deposits throughout the preceding year so you don’t leave them high and dry. Also, the IRS prefers these payments to be made in equal installments. The bad news is that they will charge a penalty if less money is paid early and more was paid later.

IRS Interest Rates

In addition to penalties, interest accrues on underpayments. The annual interest rate for underpayments is determined quarterly. For 2025, rates generally hover around 7-8%, compounding daily. This interest is charged on top of any penalties.

Can you avoid these penalties?

The easiest way to avoid IRS penalties or interest is to submit clean tax returns each year and pay your taxes yearly.

Can Tax Penalties Be Waived?

You may be able to have your penalties and interest removed or refunded if you can prove that you have reasonable cause or if you qualify for First-Time Penalty Abatement (FTA).

First-Time Penalty Abatement (FTA)

You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the Service’s First Time Penalty Abatement policy if the following are true:

• You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
• You filed all currently required returns or filed an extension of time to file.
• You have paid, or arranged to pay, any tax due.

Reasonable Cause

Here is a list of reasonable causes for which you may qualify for penalty relief:

1. A death or illness in your family
2. An error that was caused by an IRS employee
3. A mailing mistake that involves using the wrong address or postage
4. Destruction of files by a catastrophic event (fire, flood, etc.)
5. Death of a taxpayer
6. Serious illness of a taxpayer

If you are facing IRS penalties, don’t panic. Contact us to see if you qualify for penalty abatement.

IRS penalty abatement could be your best bet if you need to resolve an IRS tax debt. Please schedule your free consultation with Sarita to see if you qualify for abatement.