IRS Penalty Rules Explained
Failure-to-File (FTF) Penalty — IRC § 6651(a)(1)
5% of unpaid tax per month (or fraction thereof), up to a maximum of 25% (5 months). If both FTF and FTP apply in the same month, the FTF is reduced by the FTP rate, so the combined rate is still 5%/month. If the return is over 60 days late, the minimum penalty is the lesser of $525 (2025, filed 2026) or 100% of tax due.
Failure-to-Pay (FTP) Penalty — IRC § 6651(a)(2)
0.5% of unpaid tax per month, up to 25%. Reduced to 0.25%/month during an active installment agreement. Note: filing an extension gives more time to file but not more time to pay — the FTP penalty still accrues from the original due date.
IRS Interest Rate (2026)
IRS interest compounds daily at the federal short-term rate + 3%. The Q1 2026 rate is 7% per year; Q2 2026 dropped to 6% (subject to quarterly adjustment). Interest cannot be abated — only penalties can be reduced or eliminated.
First-Time Penalty Abatement (FTA)
Available if the taxpayer had no penalties in the prior 3 years and is otherwise compliant (filed returns and paid taxes). FTA eliminates the entire FTF or FTP penalty. Request by phone or via Form 843. This is the fastest and most commonly granted form of penalty relief.