When you fall behind on tax payments, you aren’t just responsible for the initial tax amount; you also have to pay penalties and interest. The IRS updates its interest rates every quarter, so if you have outstanding tax debt, it’s important to know what your interest rate will be and how it will affect your tax debt.

The IRS updates its interest rates every quarter. Starting January 1, 2025, IRS tax rates will decrease. Taxes owed but not fully paid will be charged 7% interest. This rate is subject to change for the second, third, and fourth quarters of 2025.

Why are interest rates so important for those who owe taxes? Those who have unpaid taxes often carry several thousand dollars of tax debt—and at that level of debt, any increase in interest rate could bump your payment up significantly. Addressing your tax debt to minimize your interest and penalties is crucial for your financial well-being. Learn more about your tax debt options by calling Seattle Legal Services at 425-428-5262.

2025 Interest Rates on Unpaid Taxes

The IRS has announced a drop in 2025 IRS interest rates. Those with outstanding tax debt will pay 7% interest on the unpaid balance. Corporations that have more than $100,000 in tax debt are charged 9% interest.

The IRS determines its interest rates based on the federal short-term rate. The underpayment rate for individuals and most corporations is the federal short-term rate plus 3%. Large corporate underpayments are charged an interest rate equal to the federal rate plus 5%.

Comparing 2025 Rates to 2023 and 2024

If you haven’t stayed up-to-date on IRS interest rates, it’s hard to know what 7% means in the grand scheme of things. The rate is lower than you’d pay on a credit card or personal loan, but how does it compare to tax rates in previous years? For comparison:

  • 2024 all four quarters: 8% for individuals and corporations with less than $100,000 in debt; 10% for large corporate underpayments
  • 2023, fourth quarter: 8% for individual and corporate underpayments; 10% for large corporate underpayments
  • 2023, first through third quarters: 7% for individuals and corporations; 9% for large corporate underpayments

How Interest Rates Can Affect You

As you see, rates in 2023 were similar to the rates we’ll see going into 2025. They crept up a full percentage point at the end of the year, which is where they stayed throughout all of 2024. A decrease in interest rates can mean significant savings for taxpayers, particularly those who carry significant tax debt.

How Interest is Charged on Unpaid Taxes and Penalties

The amount you ultimately owe the IRS depends on the initial amount of your unpaid tax debt, how long you leave it unpaid, and the penalties you accrue. Interest on tax debt compounds daily. This can dramatically affect the amount you owe.

When interest compounds daily, the amount you owe each day increases as interest is charged on the current balance. That interest is then added to your balance, and the next day’s interest is based on the total amount owed.

Not only do you have to pay interest on the initial taxes owed, but you must also pay interest on any penalties you incur as your debt sits unpaid. There are two main penalties that individual taxpayers accrue: the failure-to-file penalty and the failure-to-pay penalty. The failure-to-file penalty adds 5% of the tax bill to your debt every single month (or part of a month) that the debt remains unpaid. The amount due is capped at 25% of the initial bill. The failure-to-pay penalty is 0.5% per month and also maxes out at 25% of the initial bill.

Charging interest on taxes and penalties, as well as compounded interest, means that your tax bill will snowball out of control very quickly.

Consider an initial tax bill of $15,000. You both fail to file on time and fail to pay in full. These penalties, capped at 25% each can get up to $3,750. Interest accrues on the initial amount owed plus the penalties as they are added to your debt each month. This means that when the penalties max out, the taxpayer is being charged interest on a bill of $22,500, not $15,000.

An 8% interest rate with daily compounding adds about $1873.75 to that bill per year or around $150 per month. The longer you ignore the bill, the more the interest piles up.

Resolution Options to Reduce Interest and Penalties

It’s easy to see that unpaid tax debt and interest on unpaid taxes can get out of control very quickly, especially if you do not file on time and allow the debt to snowball without coming to an agreement with the IRS. That’s why it’s so important to address your tax debt immediately, rather than letting it build up month after month—the sooner you take action, the less you have to worry about penalties and interest. Consider these options as you plan a path out of tax debt.

Pay in Full

You can save the most money in penalties and interest by paying in full. Doing so stops penalties and interest from accumulating any longer and essentially gives you a clean slate with the IRS. However, this isn’t always an option—those who are able to pay in full generally do so right away, not months or years after payment is due. Luckily, there are many other options to consider.

Installment Agreement

The IRS offers a number of installment agreement options for taxpayers who are able to pay what they owe but aren’t necessarily able to do so upfront. Short-term payment plans require you to pay off what you owe in 180 days or less, while long-term installment agreements extend payments over as much as 72 months.

Penalties and interest continue accruing until your balance is paid in full, but you are at least making consistent progress on your tax debt and decreasing the amount you owe each month. This, in turn, reduces the amount of interest you owe. There is one added benefit—while you do still have to pay penalties, your late payment penalty drops to 0.25% per month if you have an online payment agreement in place.

Another option to explore is a partial payment installment agreement, often shortened to PPIA. This allows taxpayers to make monthly payments even if they cannot afford the minimum monthly payment for a standard installment agreement. You do have to prove that your income and assets are low enough to qualify you for this payment option, so plan on submitting substantial documentation. You make payments until the Collection Statute Expiration Date passes, at which point the IRS stops attempting to collect anything you still owe.

Offer in Compromise

Taxpayers who have limited income and assets may be able to settle their tax debt for less than they owe. The amount you have to pay is based on your ability to pay, and the IRS denies the majority of applications they receive. To apply, you have to provide extensive information on your income, assets, household expenses, and other financial obligations.

Your assets include the equity held in your home, vehicle, and other property. You’ll also indicate if you want to pay in one lump sum or spread your offered amount over a period of months. With your application, you submit either a down payment on your lump sum or the first monthly payment you’d be obligated to pay. The IRS may rescind an offer in compromise if a taxpayer provides false information, hides their ability to pay, or fails to file subsequent tax returns on time.

Penalty Abatement

In certain situations, the IRS will forgive penalties. As noted above, this can make a substantial difference in how much interest you end up paying and the final amount of your tax bill. First-time abatement may be approved for taxpayers with a history of tax compliance, which includes filing returns on time and not receiving any penalties in the three years prior to the abatement request. If penalty abatement is approved, the associated interest is automatically removed.

The IRS also grants penalty abatement if a taxpayer can show reasonable cause. To qualify for this, a taxpayer has to show that they demonstrated reasonable care in attempting to follow tax laws. Accepted reasons include fires and natural disasters, an inability to get necessary financial records, death or serious illness in the family, and system issues.

Planning Ahead

Looking ahead to the future, it’s important to make any necessary changes to avoid falling behind on taxes again. This can save you from paying more in interest in the future. If you receive a standard paycheck, you may want to adjust your tax withholdings to ensure that the IRS is taking out enough. Doing so can save you from a sizable tax bill each tax season. If you make estimated tax payments, consider adjusting how much you pay every three months.

The Cost of Ignoring IRS Debt

Ignoring your tax debt can lead to financial disaster—and the longer you let the problem go, the more expensive it becomes. When interest compounds daily, you pay interest on a larger amount every single day until you finally begin tackling the debt.

This is particularly true when penalties are being added to your bill every month. While both the failure-to-pay and failure-to-file penalties can increase your tax debt, the failure-to-file penalty is a much bigger concern. By simply filing your taxes on time, even if you cannot pay in full, you can drastically improve your tax situation.

Consider an initial tax debt of $5,000. Because you are unable to pay in full, you decide to hold off on filing until you can pay in full. After your tax return is five months late, your failure-to-file penalty maxes out at $1,250. You are now paying interest on $6,250 instead of just $5,000. One year later, you owe $6,703. By waiting to file, you have essentially cost yourself $1,700.

On the other hand, imagine that you had filed on time. Even though you could not pay in full, this saved you from the failure-to-file penalty and interest on that penalty. After one year, your tax bill is $5,362. While this is still not ideal, $300 in interest is better than $1,700 in penalties and interest.

Long-term, you risk even greater losses. If the IRS’s attempts to reach out to you about your tax debt fail, they will eventually seize your tax refunds and use levies or liens to recover what they are owed. Fighting these drastic collection efforts can cost you even more than penalties and interest.

Why 2025 is the Time to Act

There truly is no benefit to waiting to handle your tax debt. As you can see, even if your tax debt is really small, letting it build up for just one year can cost you hundreds of dollars. If you owe more, any delay could cost you thousands or even tens of thousands. Although interest rates are decreasing in the first quarter of 2025, there is no way of knowing when the federal rate will increase and take IRS interest rates with it.

Furthermore, an uptick in IRS enforcement activity or audits could saddle you with even more penalties and fees. Instead of waiting for the perfect time to file and pay off your taxes, take action and talk to a tax attorney. Comparing your options and deciding on the best path forward for you can be overwhelming, but a Seattle tax attorney for unpaid taxes can advocate for you and provide personalized advice.

When you owe the IRS money, it is crucial to keep up with IRS interest rates every quarter and truly understand how they can affect your tax debt. Don’t let tax debt derail your financial goals and stability—explore resolution options that can take the weight of tax debt off your shoulders.

If you’re facing IRS interest and penalties, our Seattle tax attorneys can help. Contact us today to explore your options and minimize what you owe. Set up a consultation online or call us at 425-428-5262.